The Big Idea
Differences in household wealth and liquidity by income
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Household finances remain in unusually good condition in the aggregate, a conclusion borne out by most of the macro statistics on wealth, liquidity and income. The Federal Reserve also publishes with a lag more detailed information broken down by income tiers. This information offers insight into why auto loan and credit card delinquencies have risen significantly and why we hear so much about financial stress on the bottom echelon of the income scale.
A quick review of the aggregate numbers
The best place to start is with the overall data. In particular, liquidity in real terms appears to have returned to more or less in line with where households want it (Exhibit 1). This picture is telling. Households had a massive infusion of resources in 2020 and 2021, especially considering that the opportunity to spend was constrained. In real terms, household liquid assets peaked in 2021 and then receded in 2022 and the first half of 2023, as consumers deployed the extra resources that they had accumulated once the economy fully reopened. This series bottomed out in the summer of 2023. Then, in the final quarter of 2023 and the first quarter of 2024, real household liquid assets resumed growth, roughly in line with the historical pre-pandemic trend.
Exhibit 1: Real household liquid assets
Note: The data show cash + bank deposits + money market account balances.
Source: Federal Reserve.
I take this as a compelling signal that households in the aggregate had managed their liquidity positions back to roughly where they wanted them to be by last summer. If there was still a cache of excess liquidity, then consumers would presumably have continued to draw down their balances in real terms to support their spending patterns. And conversely, if households had wanted to shore up their positions, they would have saved more to make that happen.
Liquid assets by income quintile
A month or two after the Fed’s aggregate Financial Accounts numbers are released each quarter, the Federal Reserve publishes more comprehensive data that break 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 the following 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%. The following six charts show the household liquid assets for each of the six groups noted above.
Exhibit 2: Liquid assets – Top 1% by income
Source: Federal Reserve.
Exhibit 3: Liquid assets – 80% to 99% income
Source: Federal Reserve.
Exhibit 4: Liquid assets – 60% to 80% income
Source: Federal Reserve.
Exhibit 5: Liquid assets – 40% to 60% income
Source: Federal Reserve.
Exhibit 6: Liquid assets – 20% to 40% income
Source: Federal Reserve.
Exhibit 7: Liquid assets – 0% to 20% income
Source: Federal Reserve.
These pictures reveal a few key observations. First, for the top 80% of the income scale, these figures, which are in nominal terms, broadly mirror the aggregate figures in real terms. Liquid assets surged in 2020 and 2021, fell for a year and a half, and then resumed modest growth late last year and early this year.
The experience for the bottom quintile was substantially different. Households in this group generally drew down their liquid assets in 2020 and 2021 when everyone else was accumulating them and then replenished somewhat in late 2022 and early last year. Perhaps the most telling aspect of these numbers is that the level of household liquid assets for the bottom quintile, even in nominal terms, is well below the pre-Covid level.
Of course, inflation has eaten away at families’ purchasing power, especially for the bottom of the income scale. Prices rose by 17.6% from the end of 2019 through the first quarter of 2024 using the PCE deflator. The percentage change in real liquid assets is different for each cohort (Exhibit 8). The top 80% of the income scale has boosted their liquid assets, even in real terms, since the pandemic. In contrast, the bottom quintile is in a much worse liquidity position.
Exhibit 8: Nominal and real liquid assets increases by income cohort
Source: Federal Reserve, BEA (PCE Inflation).
Finding the bright side
While the financial pressures laid out above are the main message, it is worth noting that households at the bottom of the income scale did not exit the pandemic era empty-handed. While their liquidity positions deteriorated, presumably reflecting in part the fact that inflation hit them hardest, they did not squander their Covid-era windfall. According to the Federal Reserve data, the bottom 20% of the income scale loaded up on consumer durable goods such as electronics, appliances, furniture, vehicles and so on. While households as a whole saw a 40% rise in their “consumer durable goods” asset holdings since the end of 2019, the bottom quintile enjoyed a 62% surge. Clearly, this cohort is less focused on financial wealth. The value of nonfinancial assets for the bottom quintile since the end of 2019 has risen by 49% compared to a 23% advance for financial assets. Even for the next quintile closest to the bottom, the corresponding figures are noticeably more balanced at 44% and 35%, respectively.
Economic implications
The Federal Reserve data defines the bottom quintile as households with incomes up to $31,200. Based on annual Labor Department for 2022, the bottom quintile of the income scale only accounts for about 9% of total consumer spending. Thus, if one believes that the top 80% of the income scale is in robust financial shape, then overall consumer spending growth should hold up well, even as those at the bottom face intense financial pressure.
However, the weakened liquidity position of this cohort offers a clear explanation for the significant rise over the past couple of years in credit card and auto loan delinquencies. Investors in consumer debt securities will want to be alert to how exposed their holdings are to lower-income households.
The danger for the broad economy would be if the pressure currently limited to the bottom quintile makes it way up the income scale over time. The backup in the unemployment rate in recent months raises that possibility. Losing one’s job is clearly the quickest way to transition from solid finances to acute stress.
The other key variable for the outlook will be the Fed’s success at controlling inflation. High inflation and high interest rates hit households lower on the income scale harder than those with more resources. This cohort, perhaps more than any other, is depending on the Fed to bring inflation down and normalize its policy rates so that the twin pressures of eroding purchasing power and punishing borrowing costs can both be alleviated. The longer these two forces persist, the more likely that they will snare a rising percentage of households.
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