Fed Officials Thought Americans Had Trillions In Excess Savings, New Data Shows They Were Wrong

It seems the strong consumer demand born out of a stay-at-home stimulus-laden pandemic environment is continuing into the end of 2022, and probably 2023 as Federal Reserve data issued Tuesday shows a sharp rise in household debt during the third quarter.

What happened: Due to significant increases in credit card usage and mortgage balances, American households increased their debt at the fastest rate in 15 years.
Total debt increased by $351 billion for the period of July to September, the largest nominal quarterly increase in 2007, suggesting that the "excess savings" the Fed believed Americans possess has already been spent.

With this increase, the total household debt in the U.S. has reached a record high of $16.5 trillion, an increase of 2.2% from the previous quarter and up 8.3% from one year prior.

Mortgage balances, which rose $1 trillion from a year ago to $11.7 trillion, and credit card debt, which increased to $930 billion, were the two biggest contributors to that debt load.

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Marking the largest annual increase in more than 20 years, collective credit card balances rose by more than 15% from the same period in 2021, showing that American consumers are not reining in household spending and are coping with the higher interest rates triggered by consecutive increases of the Federal Funds rate this year.

The number of Americans who are in default on their credit card payments and facing a charge-off is a commonly cited indicator of the financial well-being (or lack thereof) of American consumers.

Despite the fact that delinquency rates are rising, they are still historically low, indicating that consumers are managing their finances during a time of rising costs.

Why it matters: In a sharp pivot from the Fed's October report, which estimated that Americans had excess savings of about $2.3 trillion, researchers from the New York Fed attributed the credit card growth to "very robust" consumption, rising prices, and consumers using significant amounts of savings that are still in their accounts.
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“Credit card, mortgage, and auto loan balances continued to increase in the third quarter of 2022 reflecting a combination of robust consumer demand and higher prices,” said Donghoon Lee, research advisor at the New York Fed.

Mortgage debt, which has historically been the largest form of household debt, now accounts for 71% of all outstanding household debt, up from 69% in the fourth quarter of 2019.