A rise in household net worth and corporate liquidity
admin | December 11, 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.
Fiscal support and savings and the rising value of investment portfolios and real estate have combined to lift household net worth in the first nine months of this year by $5 trillion, according to the Fed’s latest financial accounts released Thursday. Corporations have added billions of dollars of liquidity. This bodes well for the consumer in 2021 and gives corporations lots of flexibility. As the pandemic likely eases next year, these parts of the economy have the resources to add to growth.
Household net worth rises $5 trillion through September
The 2020 economic downturn has been unique in many ways. One of the most striking ways has been the extraordinary degree of fiscal support offered to households. That largesse coupled with a faster-than-expected rebound in wages and salaries has pushed personal income up at a faster monthly pace since April than before the pandemic.
Households have leaned on that largesse to help sustain consumer spending, which has rebounded through October to within about 1.5% of the pre-pandemic level. Even so, households have also saved a good portion of that income, too. The savings rate, as reported by the US Bureau of Economic Analysis, has been in double digits since April.
The Fed’s latest Financial Accounts confirms that households are also sitting on high levels of liquid assets. Checkable deposits and currency have moved from $1.2 trillion at the end of last year to $1.8 trillion as of June 30 and to $2.1 trillion as of September 30. In addition, time and savings deposits have gone from $10.2 trillion at the end of last year to $11.1 trillion on June 30 and $11.3 trillion on September 30. Households have raised their liquid holdings by a combined around $2 trillion since the end of 2019. This presumably represents dry powder that households will have at their disposal to spend once the pandemic fades and opportunities to travel, attend events, and eat out that are currently unavailable become feasible again.
In addition to fiscal support, households have greatly benefited from monetary policy accommodation, which has helped to boost asset prices substantially in 2020. The combined value of households’ holdings of equities and mutual fund shares plunged from $31.3 trillion at the end of last year to $24.7 trillion on March 31. However, it rebounded to $30.0 trillion on June 30 and rose further to $32.4 trillion on September 30. As stocks flirt with record highs, the value of households’ equity holdings has risen by over $1 trillion so far this year. Meanwhile, with housing demand surging, the value of households’ real estate holdings has risen by $1.3 trillion since the end of 2019.
On the other side of the ledger, household liabilities have barely risen. Given the explosion in home sales, it is no surprise that home mortgage debt has risen, though only by about $300 billion. In contrast, consumer credit outstanding has actually fallen in 2020, as households have paid down credit card balances.
As a result, household net worth has surged this year. After sliding by $6.9 trillion in Q1, the aggregate rebounded by $8.3 trillion in the second quarter and then by another $3.8 trillion in the quarter ended September 30. In all, household net worth is up by more than $5 trillion since the beginning of 2020.
No matter how you look at household finances, they look attractive in aggregate. Income statements, cash flows and balance sheets all suggest that the consumer is in a good position to spend once the pandemic fades.
Corporations build liquidity
The financial position of the business sector is more ambiguous. Large companies went on a borrowing binge in the spring, as firms looked to secure liquidity as soon as corporate bond markets unlocked in the wake of the Fed’s announcements of support. Since the end of last year, nonfinancial corporate bond debt has jumped almost $700 billion. In addition, loans outstanding rose by another $240 billion. Corporate liabilities consequently jumped by more than $1.5 trillion in the first nine months of 2020.
Most of that borrowing is apparently being held as precautionary balances. Checkable deposits and currency holdings have risen by almost half a trillion dollars since the end of last year, while time and savings deposits are up by $70 billion, and money market fund shares have advanced by nearly $400 billion. In all, combined liquid assets are up by over $900 billion.
It will be very interesting to see what firms intend to do with those balances once the pandemic eases and the perceived need to hold elevated liquidity abates. Many firms may choose to shore up their balance sheets by repaying debt or buying back stock, but others could deploy the money, which was historically cheap to borrow, into mergers and acquisitions and capital projects in ways that directly boost economic growth.