The Big Idea
Households carried stellar balance sheets into 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. This material does not constitute research.
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.
Conclusion
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.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2025 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
