The Big Idea

Household balance sheets still look strong

| June 21, 2024

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.

The aggregate data continue to paint a very bright picture for household balance sheets, based on the Federal Reserve’s latest Financial Accounts of the United States released June 7, despite concerning trends at the bottom of the income scale indicated by loan delinquencies. Real consumer spending still should slow in the second half of the year, driven in large part by slower income growth. But any weakness for the consumer will not be driven by overextended balance sheets.

Debt loads are light

A good place to start is the overall level of household debt.  As a percentage of GDP, household debt fell in the first quarter for the 11th straight quarter, reaching its lowest reading in over 20 years (Exhibit 1).  The series has fallen well below the trend line established from 1970 through 2000.

Exhibit 1: Household debt-to-GDP ratio at the lowest in 20 years

Source: BEA, Federal Reserve.

A similar way to assess the scale of household debt is to compare it to disposable income (Exhibit 2).  This gauge is slightly less impressive than the debt-to-GDP series, but this ratio also slid in the first quarter to its lowest level in over 20 years, aside from some distorted readings during the pandemic.

Exhibit 2: Household debt-to-disposable income ratio also lowest in 20 years

Source: BEA, Federal Reserve.

Debt service burden

In a separate report, the Federal Reserve publishes estimates of the debt service burden, defined as the percentage of disposable income needed to stay current on debt payments.  With interest rates surging since early 2022, one might imagine that even for a constant level of debt, the servicing burden of that borrowing would have risen sharply.  However, the Fed data show that the debt service burden remains slightly below 2019 levels—9.8% in the first quarter compared to 9.9% to 10.0% in 2019 (Exhibit 3).  In fact, aside from the pandemic period, the measure is near the lowest on record going back to 1980. This is a testament to the prevalence of fixed-rate debt held by households, most notably for mortgages.

Exhibit 3: Debt service burden below 2019 despite higher rates

Source: Federal Reserve.

Household assets

For a second straight quarter, the Fed’s Financial Accounts data tell a very happy story for households in the first quarter.  The value of household assets surged by over $5 trillion in the quarter, as equity valuations increased noticeably.  The average level of the S&P 500 index in the first quarter was nearly 12% above the average level in the fourth quarter last year.  Over the past two quarters, total household net worth jumped by over $9 trillion to an all-time high of $160.8 trillion.  Barring a swoon in the final days of the current quarter, household asset values are likely to ascend further in the second quarter, as the stock market is once again up noticeably.

Household liquid assets

Now we turn to the lynchpin of my analysis of household finances since the beginning of the pandemic, liquid assets.  This series covers the portion of the balance sheet that represents cash equivalents and includes currency, bank deposits, and money market fund shares.  I have emphasized this measure is a proxy for spendable funds.

Household liquid assets spiked during the pandemic, reflecting in large part the unprecedented waves of federal government largesse.  Most economists presumed that consumers would spend down those balances quickly once the economy fully reopened.  However, liquid assets have remained elevated by historical standards (Exhibit 4).

Exhibit 4: Household liquid assets remain elevated

Source: Federal Reserve.

To be fair, a significant portion of the increase in spending power represented by these liquid assets has been eroded by inflation.  The level of prices, as measured by the PCE deflator, is up by roughly 18% from the end of 2019.  It is important to look at real household liquid assets, using the PCE deflator as the price index (Exhibit 5).

Exhibit 5: Real household liquid assets remain above trend

Source: Federal Reserve.

Real liquid assets came mostly back to the trend line by the middle of last year.  Those at the top of the income scale are still carrying an elevated level of real liquid assets relative to 2019, but this is more likely an investment decision than a predictor of future consumption, as high short-term interest rates have, for the time being, made cash and money market balances an attractive investment option for the first time since before the financial crisis.

After bottoming out last summer, real liquid assets resumed modest growth in the fourth quarter of 2023 and the first quarter of this year for the first time since peaking in 2021.  I take this as evidence that by the end of the third quarter households viewed their cash positions as back to “normal.” Presumably, if they were sitting on elevated liquidity that they intended to spend, the series would have continued to decline.  The real household liquid assets series inched up marginally in the first quarter.

If households in the aggregate no longer have an extraordinary liquidity cushion to supplement their spending, then the outlook for consumer spending reverts, as usual, to being driven mostly by the growth in income, particularly from wages and salaries.

This is the crux of my view that real consumer spending is poised to slow over the balance of the year.  The ongoing moderation in the labor market is producing slower income gains, which should dampen consumer demand.  Last year, real disposable income—income after inflation and taxes—jumped by 3.8% December-to-December, supporting a 3.3% advance in real consumer spending over the same period.

Over the first four months of 2024, real disposable income has risen at an anemic 0.9% annualized pace.  The numbers, as they currently stand—downward revisions to March and April may be forthcoming based on the recent May retail sales release—show that real consumer spending only increased at a 1.1% annualized clip in the first four months of this year.  I have penciled in estimates for the third and fourth quarters averaging around 1%, which should in turn drive a slowdown in real GDP growth as well.

Fraying at the edges

While the aggregate balance sheet figures remain robust, some households, especially those at the lower end of the income scale, have begun to struggle somewhat under the weight of the surge in prices seen over the past few years.  Analysts frequently cite rising credit card and auto loan delinquencies as evidence of financial stress.

A careful examination of the credit card payment data suggests no reason for alarm. The 30-day+ and 90-day+ credit card delinquencies for a group of servicers including Amex, Bank of America, Capital One, Chase, Citibank, and Discover (the numbers are compiled by Bloomberg) are a good start (Exhibit 6 and 7).  These data show that credit card delinquencies have normalized after reaching historically low levels during the pandemic but are still running somewhat lower than the 2018 and 2019 levels. I cut off the graphs at a 10-year history to keep the scale reasonable, but delinquencies were orders of magnitude higher in the years during and immediately after the financial crisis, not surprisingly, since the unemployment rate was far higher back then.  Moreover, at the margin, both delinquency rates receded over the past few months.

Exhibit 6: 30-day+ credit card delinquencies have dipped lately

Source: Bloomberg.

Exhibit 7: 90-day+ credit card delinquencies have also dipped lately

Source: Bloomberg.

Another place to look is at the 90-day+ delinquencies for auto loans, as compiled by the New York Fed and Equifax (Exhibit 9).  Here, the story is more troubling, as the delinquency rate has moved well above 2018-2019 levels.  In addition, unlike credit card delinquencies, which ticked down over the past few months, this measure continued to rise in the first quarter.

I would argue that auto loans are a bit of a special case, hit by the perfect storm of a surge in used vehicle prices in 2021 and 2022, followed by price declines since then.  In other words, the particular issues faced for auto loans may be more indicative of what has transpired in the auto sector than a sign of broader stress for household finances.  Still, for auto lenders and investors in that debt, this is a situation that warrants close scrutiny.

Exhibit 8: 90-day+ auto loan delinquencies tell a story unique to the auto market

Source: NY Fed, Equifax, Bloomberg.

Conclusion

The state of household finances is not perfect, but the latest aggregate data from the Fed confirm that, overall, the situation remains quite positive.  Healthy balance sheets should limit the stress that may occur if, as I expect, the labor market moderates over the rest of this year.  Nevertheless, I look for tepid consumer spending growth this year, driven by pedestrian gains in real income.

Stephen Stanley
stephen.stanley@santander.us
1 (203) 428-2556

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