According to an analysis conducted by economists at the Federal Reserve Bank of New York, household budgets, as a whole, remain strong enough to sustain high levels of spending. This applies even to individuals with federal student loans who had to resume payments in October. In a survey, they indicated that, on average, they would only need to reduce their monthly spending by $56. One significant factor contributing to households’ resilient spending power is the $400 billion in cash that homeowners obtained through mortgage refinancing when interest rates hit record lows during the pandemic. Despite this overall positive outlook, some borrowers are facing stress, as delinquency rates for credit cards and car loans are increasing, and some borrowers anticipate missing payments.

According to a recent analysis, the consumer spending spree that has bolstered the economy and puzzled economists may continue unabated.

Despite two years of high inflation, the end of ultra-low interest rates prompted by the pandemic, and the resumption of payments on federal student loans, many American households still possess sufficient financial strength to support their spending habits, as outlined in a report released by researchers at the Federal Reserve Bank of New York on Wednesday.

This analysis sheds light on a perplexing situation that has vexed experts and policymakers. Federal Reserve officials have raised interest rates to a 22-year high, resulting in increased borrowing costs across various loan types, including mortgages, credit cards, and car loans. These rate hikes were intended to discourage borrowing and spending, as well as to curb rampant inflation by restoring supply and demand balance.

However, despite higher costs for essential items such as food and housing, which have strained budgets, many consumers have managed to shrug off the impact of higher interest rates and sustain robust spending.

Through an examination of the Federal Reserve’s consumer credit data and a consumer survey, researchers discovered that, on the whole, U.S. households are in relatively good financial standing and plan to continue increasing their spending in the coming year. One significant contributing factor is that homeowners who took advantage of historically low mortgage rates during the pandemic have benefited greatly, collectively pocketing an astonishing $400 billion through refinancing or cashing out on their home equity.

In addition to this, individuals managed to accumulate “excess savings” during the pandemic due to limited spending opportunities and government stimulus checks, regardless of whether they were truly needed. The extent to which this surplus money remains in people’s bank accounts is a topic of debate among economists.

Another group that has benefitted from COVID-19 policies are individuals with federal student loans, who were not required to pay interest or make regular monthly payments from the onset of the pandemic until October when COVID-related forbearance ended.

According to the researchers’ estimates, borrowers saved $260 billion during the payment pause.

All of these factors have contributed to consumers’ willingness to spend. A survey conducted by the New York Fed revealed that, on average, people expected their spending to increase by 5.3% over the next year as of September. This figure is significantly higher than the 3.1% increase projected in February 2020.

Furthermore, the resumption of student loan payments may not have a significant impact on consumer spending. In a separate survey of student loan borrowers, a group of researchers at the New York Fed discovered that individuals with student loan payments anticipated reducing their spending by an average of $56 per month after payments resumed. This reduction would amount to a total decrease in consumer expenditures of $1.6 billion per month, or a modest 0.1 percentage points.

This assessment diverges from predictions made by other economists, who anticipated a more substantial impact on budgets due to the return of student loan payments. For example, in September, economists at Goldman Sachs estimated that student loan payments would dampen spending by 0.8 percentage points.

One reason for the New York Fed researchers’ more optimistic outlook is their survey of 225 student loan borrowers. The findings indicated that, among borrowers currently enrolled in a standard repayment plan, 20% planned to transition to an income-driven repayment plan, such as the new SAVE plan. These income-driven plans significantly reduce monthly payments for many borrowers, particularly those with lower incomes.

However, it’s important to note that not all households have similar financial situations. According to the data, delinquency rates on credit cards and auto loans have returned to pre-pandemic levels after experiencing a decline. Additionally, some student loan borrowers will face challenges in repayment, with an average probability of 22.6% of missing a loan payment within the next three months.