Chart of the week
The US Federal Reserve’s quarterly Flow of Funds Accounts provide data and insight on the finances of the economy’s various agents and sectors, including household net worth. Data from the third quarter confirm a paradox stemming from the Covid-19 pandemic, namely that US households are in a better financial situation than they were prior to the health crisis.
The sheer extent of the Federal support measures, which included direct financial transfers to households and very generous additional unemployment benefit, has more than compensated for lost earnings. In April, household disposable income was 17% above that of 2019 and remained 6% ahead in October.
Furthermore, lockdown measures saw households sharply reduce their spending on services. In October, consumption was still lagging its pre-crisis levels despite strong rebounds in certain categories such as durable goods purchases. Under these circumstances, households have accumulated significant savings.
Our analysis
In terms of net flows, household bank deposits have risen by $1,527 billion in the last two quarters and roughly match net household financial savings over the same period.
Meanwhile, total household debt rose by just $307 billion. If we calculate net debt by subtracting the least risky household investments (deposits), then net debt has plunged by $1,220 billion, the equivalent of an entire month’s consumption spending! In current dollars, net debt is now at its lowest level since 1993 and as a percentage of disposable income, it is at its lowest level since 1991.
Clearly, this positive news should be tempered by information on how the debt is distributed among households according to their income level. If the bulk of the improvement has already affected the wealthiest households, then the impact on consumption would be lower.
To provide further insight, the (1)Fed has begun publishing data on household wealth by income level. The latest available data are from the end of June and show that the improvement in wealth was greatest for low-income households, which are probably the ones that benefitted most from social transfers.
This sharp decline in US household net debt is a very positive factor for the recovery that should emerge when the economy exits lockdown, and all the more so since fiscal support and stimulus measures are on the horizon.
(1)Fed: Central bank of the United States.
See also: https://latribune.lazardfreresgestion.fr/en/investment-buoyant-capital-goods-orders/
The opinion expressed above is dated 16th December 2020 and is liable to change.
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