Checking In on US Household Finances at Q3’s Close

Are weakening household finances a simmering economic threat? Headlines have long argued so, with the latest bout after Black Friday week sales growth was a bit lackluster compared to recent years (and the inflation rate) amid very deep discounts, sparking fears that cash-strapped consumers are relying on bargains. For the why, headlines cite debt, pointing to October’s resumption of student loan payments and credit card debt’s topping $1 trillion earlier this year. Yet thanks to the latest Fed report on Americans’ finances—out Thursday—we can take a good look at households’ full financial picture. And, well, it is actually pretty good, showing just how resilient folks are despite inflation and other pressures—and indicating tapped-out consumers are just one more brick in the bull market’s wall of worry.

The latest data run through Q3 only, so they don’t hint at how households are responding to restarted student loan payments (though we doubt that is a major pressure—more here on why). But they do show people entered the year’s last quarter in pretty good shape overall despite a modest uptick in debt and downtick in wealth (likely tied to the late-summer equity market correction).

Exhibit 1 provides one way to see this: total debt as a percentage of households’ total financial assets—cash, bonds, stocks and other securities. It is up a smidge, both from Q2 and COVID-era lows. But those lows were an anomaly, stemming from the massive fiscal and monetary assistance, which both built savings and enabled people to pay down debt a bit. Look further back, to normal times, and you will see today’s debt load is on par with prepandemic norms and well below the levels that reigned before 2007 – 2009’s global financial crisis. At 16.0% of total financial assets, it matches Q3 2019’s tally.

Exhibit 1: Household Debt Is Benign

Source: New York Fed and Federal Reserve, as of 12/7/2023. Total household debt and total household financial assets, Q1 2003 – Q3 2023.

But even this overstates the matter, in our view, because it includes mortgage debt. We know, debt is debt, and mortgage payments are a major factor in homeowners’ monthly expenses. But it is also overwhelmingly fixed-rate and secured by a house, making it a different animal than credit card debt, student loan balances and auto debt. So Exhibit 2 zaps out mortgage debt, focusing on the more directly consumer-related items. The current figure—4.8%—is below all prepandemic readings on record.

Exhibit 2: Consumer Debt Is Benign, Too

Source: New York Fed and Federal Reserve, as of 12/7/2023. Total household debt excluding mortgages and total household financial assets, Q1 2003 – Q3 2023.

Obviously these are broad totals, with some skew (particularly on the wealth side) from the highest net-worth folks. So not every household’s experience matches this exact trajectory—true of any aggregate statistic. But the trends are still telling, and they show how much households’ discipline and deleveraging have paid off since the financial crisis. They also show how inflation has helped make the overall debt picture better, not worse. We know this is counterintuitive, but stick with us. When you take out a loan, you have to pay interest over its lifespan, but the principal is locked in and doesn’t rise with inflation. So as prices jumped the last couple of years—lifting wages—debt taken on before then didn’t jump with them. It stayed stagnant, with fixed-rate payments also steady. And as wages rose, it became overall less of a burden. We aren’t calling inflation some massive positive, but inflating away a bit of the debt pinch is a nice silver lining.

None of this is predictive, mind you. These data are all backward-looking and, at this point, nearly two and a half months old. But they hint at reality being better than people perceive, especially since consumer debt concerns have swirled all year. We now know the data cut against those fears through Q3 at least, and with inflation easing and wages still rising, we doubt that changes any time soon. It isn’t a big economic tailwind, but it does suggest fundamentals are stronger than headlines imply.