The Big Idea

Looking for slower consumer spending growth

| December 1, 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.

Consumer spending has consistently surpassed expectations for most of the last few years, fueled by extraordinarily strong household balance sheets and a robust labor market. But Federal Reserve data on liquid assets by income category suggests most households have seen their pandemic-era windfall eaten away by inflation. Consumer demand going forward, especially for lower-income families, will likely be mostly driven by the pace of income growth. And that suggests a much slower increase in household outlays in 2024.

Federal Reserve balance sheet data

Most economists continue to base the bulk of their analysis of household finances on intricate models that depend on the personal savings rate.  The problem with this approach showed up clearly in September, when benchmark GDP revisions led to massive changes in the savings rate over the past several years. The revisions substantially altered what these models indicated for household liquidity.

As an alternative, the Federal Reserve publishes detailed data on household balance sheets quarterly, a dataset that I have highlighted repeatedly in recent years.  A month or two after the aggregate numbers come out each quarter, the Federal Reserve publishes more comprehensive data that breaks down the results in several different ways, including by income.  These data are called the “Distributional Financial Accounts,” and they offer an interesting view of household finances across the income spectrum.

Households are divided into six groups along the income scale: the top 1%, 80% to 99%, 60% to 80%, 40% to 60%, 20% to 40%, and 0% to 20%.  This piece examines the household liquid assets series—bank deposits plus money market fund balances—as a conservative proxy for households’ spending power for each of these groups.

Liquid Assets by Income Quintiles

The following charts show the household liquid assets for each of the reported groups (Exhibit1 through Exhibit 6).

Exhibit 1: Liquid assets for the Top 1% income bracket

Source: Federal Reserve.

Exhibit 2: Liquid assets for the 80%-to-99% income bracket

Source: Federal Reserve.

Exhibit 3: Liquid assets for the 60%-to-80% income bracket

Source: Federal Reserve.

Exhibit 4: Liquid assets for the 40%-to-60% income bracket

Source: Federal Reserve.

Exhibit 5: Liquid assets for the 20%-to-40% income bracket

Source: Federal Reserve.

Exhibit 6: Liquid assets for the 0%-to-20% income bracket

Source: Federal Reserve.

These pictures reveal a few key observations.

First, the predominant narrative regarding household balance sheets, derived from analysis of the savings rate, is wrong.  Households have not been furiously spending down their savings to maintain unsustainable consumption patterns.  For most quintiles, the level of liquid assets has barely come off from its highs.  In fact, for the 20% to 40% quintile, the latest reading, for the second quarter of this year, set a new high.  The lone exception is the middle quintile, but even for this group, the series jumped by almost $340 billion from the end of 2019 through the first quarter of last year and has only retraced about $90 billion of that over the next five quarters, about a quarter of the Covid windfall.

However, while the nominal level of household liquid assets has remained elevated, inflation has eaten away at families’ purchasing power, especially for the bottom 40% of the income scale.  Prices have risen by just over 15% since the end of 2019 according to the PCE deflator. The percentage change in real liquid assets across cohorts varies from very positive to basically flat.  The bottom 40% of households are basically back to their pre-Covid levels of liquid assets in real terms.

Exhibit 7: Nominal and Real Liquid Assets Increases by Income Cohort

Source: Federal Reserve, BEA (PCE Inflation).

Back to Normal

The nominal and real income data present a picture of consumer behavior since the beginning of the pandemic that is quite different from the conventional wisdom.  The prevailing narrative is that households were presented with a windfall during the pandemic and proceeded to spend like drunken sailors until the money ran out.  Economists and financial market participants have been racing to pinpoint the moment when the “money ran out” for at least a year and, as a result, have had economic forecasts that were dramatically too pessimistic.

A more accurate description is that households spent part of their windfall but squirreled away a significant portion.  As noted above, the nominal balances of liquid assets have been largely steady since peaking in early 2022.  However, unfortunately, households have seen their beefed-up nest eggs get eaten away by inflation over the past two years.  Not only is this a more accurate description of household behavior but it also helps to explain why consumer confidence is so low.  Consumers are angry about inflation and high prices, a fact that is clear from the various confidence surveys.

As I have described in previous pieces, households have benefited greatly this year from a swing to positive real wage growth.  Headline inflation has come down sharply this year, while nominal wages have decelerated more modestly.  As a result, workers have gone from “not keeping up” with inflation in 2021 and 2022 to enjoying significant real gains in 2023; real disposable income rose at roughly a 4% annualized pace in the first nine months of this year.  It is this income growth, not an irresponsible binge of savings-fueled spending, that has resulted in much stronger than expected real consumer expenditures in 2023.

While the top quintile still hold a significant portion of their pandemic-era windfall, this is arguably, at least in part, more an investment decision than a precursor to a spending surge, as high short-term interest rates have made money market funds and other short-term instruments a viable investment alternative for the first time in many years.  In my view, while the aggregate data still show the consumer with elevated liquidity, the data broken down by income quintile suggest that most households are more or less back to where they were before Covid in terms of liquid assets after adjusting for inflation. In total, though, they are far wealthy given the heavy purchases of homes and consumer durables during the pandemic and the appreciation of houses and equities.


My expectation is that, as was broadly the case in 2023, the consumer will rise or fall in 2024 based on income growth, not accumulated savings.  This year, that resulted in a much better than generally expected outcome.  However, if the labor market continues to moderate in the coming months, consumers will likely be forced to slow their spending growth.

In particular, the economic landscape leaves lower-income households especially vulnerable heading into 2024.  They have been hit hardest by inflation, because they spend a higher proportion of their budget on necessities like food and energy that have seen the largest price hikes since the pandemic began.  In addition, they would also presumably be the most at risk in the event that the labor market weakens next year.  Finally, because they have the least savings and depend most heavily on borrowing, they are likely to be hurt most by higher interest rates. Those with more resources may actually benefit from earning a decent real return on their savings.  The significant backup in delinquency rates for auto loans and credit cards in recent quarters offers evidence that this dynamic has already begun.

There is clearly a limit to how bad things can get if the unemployment rate remains in the neighborhood of 4%, but the corrosive impact of inflation on household finances and the resulting drag as the Federal Reserve is forced to run a restrictive policy stance to rein in that inflation are likely to take a toll next year, a key reason that I look for real consumer spending growth to slow to around a 1% advance in 2024 after widely exceeding consensus expectations in 2023.

Stephen Stanley
1 (203) 428-2556

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

Important Disclaimers

Copyright © 2024 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.

The Library

Search Articles