Strong consumer balance sheets, but spending still should slow

Stephen Stanley | March 21, 2025

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 confidence has sagged in early 2025, and several retailers have warned that shoppers are showing signs of more caution. The Fed’s latest Financial Accounts of the United States through the fourth quarter of last year still paints a very bright picture for aggregate household balance sheets.  But given deteriorating confidence and slowing wage gains, I look for real consumer spending to slow in early 2025.

Debt loads are light

A good place to start looking at consumer balance sheets is the overall level of household debt.  As a percentage of GDP, household debt fell in the fourth quarter for the 14th 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 and in the fourth quarter slipped below 70% for the first time since 2000.

Exhibit 1: Household debt-to-GDP ratio

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 the ratio also slid again in the fourth quarter to its lowest level since 1999, aside from some distorted readings during the pandemic.

Exhibit 2: Household debt-to-disposable income ratio

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, running at 11.3% in the fourth quarter compared to 11.5% to 11.7% in 2019.  In fact, the measure is lower than at any time before the pandemic going back to 2005 (Exhibit 3). This is a testament to the prevalence of fixed-rate debt held by households, most notably for mortgages.

Exhibit 3: Debt service burden

Source: Federal Reserve.

Household assets

The Fed’s latest Financial Accounts data show that the value of household assets barely rose in the fourth quarter.  Still, this comes after massive increases in each of the first three quarters of the year.  For all of last year, household asset values surged by over $14 trillion to end the year at $190.2 trillion, mostly reflecting the jump in stock prices in 2024.

Tying household balance sheets back to consumer spending, there is an important point to be made. The Fed’s tight monetary policy has made it difficult for households to liquify their soaring asset values, as high interest rates and relatively tight lending standards have made it difficult for households to tap what for many is their largest asset: their homes.  In the 2000s, at the drop of a hat, homeowners could execute a cash-out refinancing when their home values shot up. With mortgage rates so much higher than before and during the pandemic, this is not a desirable option for most mortgage holders.

One indication of this dynamic is a measure that the Fed reports on in the Financial Accounts each quarter: owners’ equity as a percentage of real estate values. Throughout 2024, this measure hovered between 72% and 73%, the highest readings since the late 1950s. During the 2000s, even as home prices were soaring, homeowners were tapping their equity so fast that their ownership stake was actually falling (Exhibit 4). In contrast, the gauge has jumped by around 7% since the end of 2019.

Exhibit 4: Owners’ equity as a percentage of real estate values

Source: Federal Reserve.

While balance sheets are historically strong, the marginal impact of rising net worth on consumer spending, what economists call the “wealth effect,” has likely been far more limited than it might have been under a different interest rate profile.

Household liquid assets

Given the windfall that households received during the pandemic, I have closely tracked in recent years the evolution of household 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 5).

Exhibit 5: Household liquid assets

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, has risen by nearly 20% since the end of 2019.  Real household liquid assets, using the PCE deflator as the price index, came   mostly back to the trend line by the middle of 2023 (Exhibit 6). 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 an attractive investment for the first time since before the financial crisis.

Exhibit 6: Real household liquid assets

Source: Federal Reserve.

Since mid-2023, real liquid assets resumed modest growth, more or less consistent with upward trend that had been in place for decades prior to the pandemic.  I take this as evidence that by mid-2023, 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.

If households in the aggregate no longer have an extraordinary liquidity cushion to supplement their spending, then the outlook for consumer spending should revert, 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 in 2025. Last year, real consumer spending steamed ahead, advancing at a 3.1% pace (December/December), far outpacing the corresponding rise in real disposable income (2.2%).  Consumers were probably due for a bit of a pullback heading into 2025 anyway.  On top of that, the labor market has been moderating, and I expect that real income gains could slow further in the coming months.  At the moment, I am projecting a real annualized increase of less than 1% for consumer spending in the first quarter.

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.

More detailed Federal Reserve data on household finances broken down by income quintiles show that lower-income households have seen their liquid assets positions weaken.  For the top four quintiles, liquid assets have risen by anywhere from 28% to 48% cumulatively since the end of 2019 (vs. inflation of about 19%).  In contrast, for households in the bottom 20% of the income scale, liquid assets are actually lower in nominal terms than at the end of 2019 (even before adjusting for inflation).  It is no wonder that retailers have noted that lower-income households are altering their shopping patterns to economize.

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 little reason for alarm.  Exhibits 7 and 8 show 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).  These data demonstrate that credit card delinquencies have levelled off after rebounding from historically low levels during the pandemic but are still running lower than the 2018 and 2019 levels.  In fact, the current levels are well below longer-term averages and have been roughly steady over the past year.

Exhibit 7: 30-day+ credit card delinquencies

Source: Bloomberg.

Exhibit 8: 90-day+ credit card delinquencies

Source: Bloomberg.

The New York Fed and Equifax also compile 90-day+ delinquencies for auto loans (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 have fallen back since the start of last year, this measure has continued to ascend.

In my view, 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 on balance 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 broad acute stress for household finances.  Still, for auto lenders and investors in that debt, this is a situation that warrants close scrutiny.

Exhibit 9: 90-day+ auto loan delinquencies

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, balance sheets remain quite robust.  Healthy finances should help to limit the stress for households as the labor market cools.  Nevertheless, I look for tepid consumer spending growth over the next few quarters, driven by pedestrian gains in real income.  Moreover, households at the bottom of the income scale have seen their liquidity position deteriorate and could be particularly vulnerable if the labor market weakens considerably and/or tariffs lead to another bout of inflation.