The Shock-Resistant US Economy

States in the Black, Households Flush — and a Heavier Federal Tab

Global Perspectives | November 2025

• The pandemic effectively shifted leverage onto Washington, leaving households, companies, and state & local governments with sturdier balance sheets — which is one reason growth has proved hard to slow.
• Consumers and firms still sit on sizable cash and equity cushions, supporting spending and hiring, though pressure is building at the lower end of the
  credit spectrum.
• The trade-off is a heavier federal interest bill: As borrowing costs rise, the Treasury’s tab becomes the economy’s new “speed limit” and a growing constraint on policy.

BALANCE-SHEET TRENDS EXPLAIN US ECONOMIC RESILIENCE

The US enters late-2025 with an unusual mix of strengths and constraints.¹ Households, companies, and state and local governments look sturdier than they have in years. Yet the federal government’s balance sheet — after financing the pandemic response and its aftermath — carries far more leverage, and a rising interest bill that now shapes the outlook. One way to read the recent data: Resilience was bought with red ink, and the bill is increasingly visible in Washington’s interest line.

Start with the cushion. The best single explanation for why growth has been so resilient despite higher interest rates is simple: Private balance sheets are fat with assets and cash. As of mid-2025, household and business net worth stood roughly $31 trillion and $5 trillion above their pre-pandemic trends, respectively — an enormous buffer that taps into both the housing boom and a recovery in equity values (Figure 1). Cash hasn’t disappeared either. Household money balances are about $4.2 trillion above trend, and business money holdings about $1.6 trillion above trend, leaving ample liquidity to smooth shocks (Figure 2).

 

 

 

The same story shows up in traditional debt metrics. Mortgage debt has drifted back to roughly its
late‑1990s share of GDP, far below the 2000s peak; consumer credit’s share is near multi‑decade
lows — a starting point very different from 2007 (Figure 3). In aggregate, household debt‑to‑GDP
has fallen for 16 straight quarters to the lowest in more than 25 years. Perhaps more surprising, the
household debt‑service ratio is about 11.2% — slightly below its 2019 average — despite higher
rates, reflecting the prevalence of fixed‑rate mortgages and solid income growth (Figure 4).

 

 

WHY CONSUMERS HELD UP

The post‑pandemic consumer looks very different from the pre‑GFC borrower. Owners’ equity
in real estate has hovered around 72% – 73% of home value — the highest since the late 1950s
(Figure 5). That equity cushion, paired with locked‑in mortgage rates, has insulated most
households from the rate shock even as credit conditions tightened.

 

 

None of this denies pockets of strain. Credit‑card delinquencies among major servicers remain
below pre‑COVID readings, but auto‑loan delinquencies sit near their highest since the financial
crisis, and FHA mortgage delinquencies have risen, underscoring stress at the lower end of the
income distribution. Analysts at J.P. Morgan add that cracks are emerging in non‑prime
consumer credit, prompting downgrades of several specialized lenders — important for those
firms but unlikely to be “material” for prime lenders in a still‑robust economy.² The distribution
matters: Higher‑income households, cushioned by equities and home equity, are driving a bigger
share of spending; lower‑income cohorts feel the pinch of higher prices and floating‑rate
borrowing.

One structural residual from the past 15 years is student debt. Student loans’ share of GDP
climbed from 3.5% in 2006 to 8.4% by 2020 (Figure 6). That surge helped cap credit‑card
borrowing for a time and remains a pinch point for younger households now that pandemic
forbearance has ended. It’s not large enough to overturn the aggregate story, but it explains
some of the cross‑currents in spending and credit quality by age and income.

 

 

Corporate credit looks steady rather than crisis‑prone, with many Chief Financial Officers having
termed out debt at low coupons and built cash. Still, the recent blowups at subprime auto lender
Tricolor and auto parts supplier First Brands show that pockets of stress remain — especially in
non‑prime and opaque private‑credit niches. With debt service largely fixed for now, profits
continue to cover interest comfortably for most investment‑grade names, reducing the risk of a
near‑term default wave. The maturity calendar may pose some challenges in 2026 – 2027, but
firms start from higher equity and cash levels, which helps them manage higher refinancing
costs.

STATES IN THE BLACK, FEDS IN THE RED

Another important shift since 2020 is in public finance. State and local debt has fallen to about 12% of GDP — the lowest in decades — while federal debt sits near 105% of GDP (Figure 7). The chart makes it clear: Federal transfers during the pandemic helped sub-national governments repair and fortify their books. That’s a crucial difference from the post-2008 cycle, when state and local austerity was a drag on growth. Today, sturdier municipal ledgers, including record rainy-day funds in many states, help stabilize services and investment even as growth cools.

 

 

Considering all types of debt, the economy didn’t lever up as much as feared. At the height of the COVID shock, total outstanding debt spiked to a record share of GDP. But as inflation and real growth lifted nominal GDP, the economy-wide debt-to-GDP ratio receded toward its 2019 level — another reason private-sector credit hasn’t looked “crowded out” (Figure 8). The composition matters, too: Financial-sector debt now remains below pre-pandemic levels and far below 2008, while non-financial debt sits only slightly above pre-COVID and well off its peak (Figure 9).

 

 

 

In other words, concerns about the high level of overall debt may overlook the fact that the most systemically risky part of the last crisis — the financial sector — has not been the driver this time. The speed limit: federal interest. The trade-off for all this private-sector and municipal resilience is that more leverage now sits at the federal level, where interest costs are rising fastest. The Congressional Budget Office projects net interest near $1.8 trillion by 2035 — roughly 4% of GDP — a budget headwind large enough to shape taxes and spending for years (Figure 10).

 

 

That doesn’t imply an imminent crisis; the US still benefits from deep Treasury markets and reserve-currency status. But it does create a policy tension: the Fed has been able to keep rates higher for longer precisely because private balance sheets are strong, yet higher rates raise the Treasury’s interest bill, narrowing fiscal room and eventually putting upward pressure on the term premium.

A SHOCK-RESISTANT ECONOMY

Putting the pieces together, the US outlook looks constructive. Private-sector cushions (wealth, cash, debt locked in at low rates) and stronger municipal ledgers have made the economy more shock-resistant. That resilience is why rate hikes didn’t torpedo growth, why the labor market bent but didn’t break, and why consumption slowed rather than slumped. At the same time, the center of gravity for leverage has shifted to Washington, where net interest is becoming the macro speed limit. If growth cools and inflation fades before interest costs crowd out, the economy can normalize without surrendering its balance-sheet gains. If not, fiscal arithmetic could demand harder choices.

For investors, the practical takeaways are straightforward. Consumer demand should decelerate, not collapse, with prime credit performing and non-prime requiring sharper underwriting.

Corporate credit looks steady rather than crisis-prone, with the 2026 – 2027 refinancing hump the key test for weaker balance sheets. Municipal credit remains supported by leaner debt loads and healthier revenues. The real asset-allocation question lives out the curve: How much term premium is needed to absorb a steady stream of Treasury supply as net interest marches higher?

The pandemic era didn’t simply add debt. It rearranged it. The result is a sturdier private core and a heavier federal anchor. Navigating that trade-off — keeping the resilience without letting the anchor dig in — will define the next phase of the cycle.

 

¹ This piece updates data and analysis from W. Sterling, “Leverage Revisited: Assessing US Debt amid Recession Fears,” GW&K Global Perspectives, April 2023.

² Richard Shane, et al., “Consumer Finance Q325 Preview,” J.P. Morgan North American Equity Research, October 7, 2025.