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The surprising story of pandemic household finance

| September 25, 2020

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Household finances have taken a dizzying roller coaster ride in 2020 as asset prices sank in the early days of the pandemic and then rebounded when the Fed stepped in with robust support to financial markets. By the middle of this year, household net worth had retraced its first quarter drop. And the details of household balance sheets show that consumers have plenty of wherewithal to spend, thanks in part to federal largesse.

Balance sheet rebound

One of the most remarkable findings in the recently released Financial Accounts of the United States is the massive round trip seen this year in the household balance sheet. Household net worth sank by more than $7 trillion in the first quarter of 2020, more than a 6% drop. The value of household equity holdings accounted for the bulk of the decline, as the S&P 500 index plunged by 20% from December 31, 2019 to March 31, 2020.

Household asset values came roaring back in the spring. The bulk of the improvement reflected a bounce in stock prices, though equity holdings only recovered about three-quarters of the first quarter drop. In addition, real estate holdings posted a solid increase, a result that would have seemed improbable at the end of March, when there was a consensus that the housing sector would pull back substantially. Households’ liquid assets also surged. As a result, household net worth fully reversed the first quarter plunge, rising by $7.6 trillion to almost $400 billion higher than the December 31 reading.

Just to put these swings into perspective, during the 2008 financial crisis and its aftermath, it took more than a year for household net worth to decline by $7 trillion, and then it took two years to get back that $7 trillion. We did not get back to the 2007 peak in household net worth for five years. This time, we made it back in a single quarter.

More narrowly, household real estate holdings clearly look very different than they did during the financial crisis. Back then, home values sank and took years to recover. This time around, the aggregate value of the largest asset for most households posted healthy advances in the first and second quarters.

Household liquid assets

The 2020 recession looks starkly different than any previous economic downturn for many reasons, but there is one that is particularly meaningful: federal government support was so timely and so massive that personal income has been considerably higher in 2020 than it would have been in the absence of the pandemic. The one-two punch of $1,200 household rebate checks and extremely generous jobless benefits, higher than the lost wages for the majority of workers, left households flush, even in the midst of the steepest downturn since the Great Depression.

The Fed’s Financial Accounts data show the results of that largesse. Even with consumer spending rebounding more forcefully than had been anticipated in May and June—in fact, retail sales exceeded pre-pandemic levels by July—household liquid assets surged in the first and second quarters.

Checking accounts and currency jumped from $1.2 trillion on December 31, 2019 to $1.8 trillion by June 30. Savings accounts and CDs surged from $10.2 trillion to $11.2 trillion. Finally, money market fund holdings rose from $2.2 trillion to $2.6 trillion. In all, liquid assets surged from $13.6 trillion at the end of last year to $15.6 trillion on June 30, a $2 trillion jump.

Recent comments from Bank of America CEO Brian Moynihan corroborated this trend. He noted that checking and savings accounts at his bank are off their peaks, hit right after the rebate checks were distributed and at a time when consumers were stuck at home and unable to spend on a variety of services during lockdowns, but remain well above where they were a year ago. Moreover, this trend is particularly clear for smaller accounts such as lower-income households.

The fact that most households had ample resources helps to explain how the economy, and, in particular, consumer spending has rebounded so much faster than in prior cycles. It also helps to explain how the economy has weathered the expiration of the $600 per week bonus unemployment benefits and the lack of a second round of rebate checks. The boosts to income from federal transfer payments already made should be sufficient, at least in the short-run, to sustain the household sector in the aggregate although, to be sure, there are many households that will struggle mightily until the economy gets back to full health.

This course of events is far different than the typical recession. In recent cycles, recoveries have been slow and sluggish, in large part because halting gains in employment have limited gains in household income and constrained households’ ability to spend. In 2020, even with elevated jobless rates and unprecedented economic disruption, households have remained flush with purchasing power and have followed through by spending generously on goods and services not affected by the pandemic lockdowns.

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