The Big Idea

A strong consumer on average, weaker at lower incomes

Stephen Stanley | May 30, 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.

Household finances remain robust in the aggregate, a conclusion borne out by most of the macro information available through March. The Federal Reserve also publishes, with a lag, more detailed information broken down by household income. The detailed information offers insight into why there is so much concern about households at the bottom end of the income scale.

A quick review of the aggregate data

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. That shows up in household liquid assets—cash plus bank deposits plus money market account balances—in real terms through the end of last year (Exhibit 1).

Exhibit 1: Real household liquid assets

Source: Federal Reserve, BEA.

This picture summarizes household finances during and after the pandemic. 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 and has since then resumed growth, roughly in line with the historical pre-pandemic trend. 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 mid-2023. Thus, spending patterns returned more or less to the normal pattern of being driven mainly by income growth.

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 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 through the end of last year.

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 after mid-2023.

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 increased liquidity at a modest pace, like everyone else, over the last two years. 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 19.6% from the end of 2019 through the fourth quarter of 2024 using the PCE deflator (arguably, given the composition of their purchases, inflation has been even higher for lower-income households). Just look at the percentage change in real liquid assets 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).

Over the five-year period from the end of 2019 to the end of 2024, nominal GDP rose by a little over 35%. Relative to that advance (since household liquid assets should probably expand not only to offset inflation but also to mirror the real growth in the economy), liquid assets for the top 80% of the income scale have increased modestly faster than the economy. In contrast, the bottom 20% have fallen dramatically behind relative to everyone else.

Storm clouds building

While households in the bottom 20% of the income scale have not been able to grow their liquid assets in tandem with the economy, they have been bolstered by a generally robust labor market. The number one fundamental for the typical middle-income or low-income consumer is whether they have a job. The unemployment rate has been no higher than the low 4%’s since late 2021, generating large enough income gains to sustain consumer demand. Concerns that the labor market may deteriorate substantially on the back of tariff-induced economic weakness could create a major problem for lower-income households.

A second problem that is confronting households, especially at the lower end of the income scale, is the return of student debt liabilities. Congress passed legislation requiring the end of the forbearance period for most borrowers in October 2023. However, most borrowers enjoyed a further one-year grace period. Thus, technically, most former students had until the fall of last year before they needed to begin making payments again.

That means, as we entered 2025, that numerous households faced a sudden new financial obligation. Aggregate delinquency rates, as reported by the New York Fed, leaped from below 1% in the fourth quarter of 2024 to about 8% in the first quarter of this year. In addition, news reports have laid out examples showing how confusion between servicers and debtors has led to instances of households getting reported to credit agencies and having their credit scores plunge, in some cases without the borrower even realizing that they were supposed to be making payments. The Department of Education went a step further in early May, announcing that it will resume collections of defaulted loans.

To be sure, the scale of student loan debt, especially in light of various income-based repayment options, is unlikely to dramatically alter the trajectory of the overall economy. Nonetheless, for a cohort that is already dealing with significant financial stress, the return to normal repayment schedules for student loans adds another headache for some lower-income households.

Economic implications

The Federal Reserve data defines the bottom quintile as households with incomes up to $31,200 (as of the end of 2021). Based on annual Labor Department data 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 few 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 fastest path to that scenario would be a sharp softening in the labor market. While I expect only a modest backup in the unemployment rate over the next few months, there is a risk of a more substantial move.

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

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