The Big Idea

Households carried stellar balance sheets into 2023

| March 31, 2023

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.

With tighter bank credit a possibility going forward, it is reassuring that aggregate household finances were still in stellar shape heading into 2023.  At least that’s the story told in the Federal Reserve’s recent release of the Financial Accounts of the US for the fourth quarter of last year, a report that includes data on household balance sheets.

Liquid assets

Those who have been reading my economic analysis for any length of time should be quite familiar with the series that I have labeled “household liquid assets.”  It comes from the household balance sheet table in the Fed’s quarterly Financial Accounts of the US.  It is defined as the sum of households’ holdings of currency, bank deposits, and money market fund shares.  These are readily spendable resources, dry powder for the consumer.

The trillions of dollars of fiscal largesse handed out in 2020 and 2021 as well as a period of extraordinary saving during the pandemic, when the opportunity to spend on certain activities like travel were constrained, resulted in an unprecedented run-up in household liquid assets.

In the decade through 2019, this liquid assets series rose by an average of about $500 billion per year. If that trend had continued in the hypothetical scenario where the pandemic never happened, households might have amassed another $1 trillion in liquid assets in 2020 and 2021 combined.  Instead, the measure surged by a whopping $5 trillion, putting households about $4 trillion ahead of the game entering last year.

It was natural to assume that when pandemic restrictions eased, consumers would go crazy in a spending frenzy. However, in the end, this did not happen.  There were anecdotal reports of packed airports during the summer, and it does appear that the demand for travel services was unusually robust, But overall consumer spending rose by a mere 1.8% in real terms in the four quarters of 2022.  There is good news and bad news in this surprise.  The bad news is that the economy proved far more lackluster last year than I had anticipated.

The good news is that households by and large held on to their extraordinary pandemic-driven liquidity buffer. All through last year, economists raced to be the first one to declare that consumers were “tapped out” and had burned through their pandemic cushion, heralding trouble on the horizon for spending.  However, these declarations have simply not been true, at least in the aggregate.  The liquid assets series peaked in the first quarter of 2022 at $18.5 trillion—as mentioned above, about $4 trillion higher than the pre-pandemic trend would have suggested. Households did tap into that cushion over the balance of the year. But the tally only declined by about $300 billion over the final three quarters of 2022.  That still leaves consumers with an extra $3.2 billion cushion, well above pre-pandemic trend and more than enough to sustain consumer spending in 2023 (Exhibit 1).

Exhibit 1: Household liquid assets continue to run above pre-pandemic trend

Source: Federal Reserve.

It is important to note that these figures are in the aggregate.  They tell us nothing about the distribution of liquid assets across households.  There have been many anecdotal reports that lower-income families are experiencing considerable financial stress, which stands to reason, as they are hardest hit by inflation and tend to have the smallest nest eggs to fall back on.  In a future piece, I will examine the more detailed Fed data that are broken down by income level. But, as a preview, the detailed figures suggest that lower-income households are not in quite as dire a financial situation as much of the recent commentary suggests.

Household debt

On the other side of the balance sheet, while assets remain inflated, household debt has not risen as a proportion of GDP. The ratio of household debt to GDP has fallen for eight straight quarters through the end of 2022 and is below 75% for the first time since 2001 (Exhibit 2). There has been some talk about a runup in credit card debt in 2022, but the aggregate data do not suggest that households are becoming overly indebted.  On the contrary, relative to the size of the economy, debt burdens are the lightest in over 20 years.

Exhibit 2: Household debt-to-GDP ratio

Source: Federal Reserve, BEA.

I believe that one problem some analysts and observers are having is adjusting to higher inflation.  Any nominal time series is likely to have increased faster in 2021 and 2022 simply because inflation was so high.  To say that consumer credit, which increased by nearly 8% nominally in 2022 according to the Fed’s Financial Accounts data, rose at the fastest pace since 2001 sounds impressive.  However, since the PCE deflator surged by 6.2% last year, the gain in real terms for consumer credit was less than 2%.  Alternatively, we could measure the 7.9% rise in nominal consumer credit against the 9.1% jump in nominal labor income.

Debt service

Another angle to examine is the cost of servicing household debt.  As interest rates have climbed, even an unchanged level of debt could impose a greater financial burden on families.  However, the Fed’s data on debt service payments and financial obligations as a percentage of disposable personal income show that, through the end of last year, debt service was not yet imposing a damaging strain on households.

To define the variables, debt service payments include required monthly payments on various types of closed-end loans—mortgages, car loans and son on—and for revolving debt, 2.5% of the monthly balance.  The financial obligations ratio includes debt service plus rent payments, auto lease payments, homeowners’ insurance, and property tax payments.

Debt service and financial obligations ratios increased in 2022, as borrowing rates surged (Exhibit 3). But as of the end of last year, the ratios were still slightly below their levels just before the pandemic, which happened to be the historical pre-pandemic lows going back to 1980, indicating that so far, rising interest rates are far from posing an overwhelming burden on households.  Even as obligations have risen along with borrowing rates, income has posted impressive nominal gains that offset higher debt service.

Exhibit 3: Debt Service and Financial Obligations Ratio

Source: Federal Reserve.


Examined from several different angles, household finances appeared to enter 2023 in exceptionally good shape.  However, consumers may face substantial challenges this year, with the impact of higher borrowing costs continuing to set in, the prospect of a noticeable tightening of credit conditions due to the recent banking sector issues, and a prospective end to the student debt moratorium.  Still, for now, when you hear that the siren song that consumers are tapped out, you can rest assured that households are, at least for now, still in the aggregate doing quite well.

Stephen Stanley
1 (203) 428-2556

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