Our friends at Alta Capital Management, an investment firm specializing in equities, recently provided insightful analysis on the latest household balance sheet data from the U.S. Federal Reserve's Financial Accounts for Q2 2024. We found their perspective valuable and thought it was worth sharing with you.
Quick thoughts on household balance sheet data
The US Federal Reserve (Fed) just released their under-noticed Financial Accounts of the United States for Q2 2024 and I am once again going to draw attention to the dataset that includes detailed information on balance sheets of different sectors of the economy including, most notably from my lens, households.
According to these new figures, aggregate household net worth (total assets less liabilities) in the US increased by US$2.8 trillion (+1.7% quarter-over-quarter (QoQ)) over the three months ended June to a new record high of US$164 trillion — the value of household financial assets rose by US$1.1 trillion (+0.9%) in the quarter while nonfinancial asset values rose by US$1.8 trillion (+3.0%); liabilities rose by just US$177 billion (+0.9%). That’s an average of US$61,000 per person aged 16 and over or roughly US $1.25million per household, which also marks an all-time high.
While these data are just the overall tallies and do not provide a breakdown across wealth/income/age cohorts (the Fed’s Distributional Financial Accounts are released with a couple of weeks’ lag), the fact remains that American households are the wealthiest that they have ever been in nominal terms (and as the Distributional Financial Accounts have shown, the bottom-up of the wealth spectrum has been recording the best relative gains) — adjusting for inflation, the total remains 0.8% below its peak from the end of 2021 as the surge in prices eroded the purchasing power of that accumulated wealth.
The significant accumulated wealth in the US puts the reported decline in savings rates to historically low levels in some better context — if you have a decent (and growing) nest egg, there is less impetus to save out of current income, which in turn provides a pretty good explanation as to why consumer spending has proven so resilient in the face of high costs of living and rising interest rates (and note that the need to rebuild savings following the housing market crash was a big factor constraining consumer spending and growth throughout the 2010s).
And on the topic of rates, US households have generally found themselves insulated from the sharp increase in rates due to low overall debt loads. In stark contrast to the debt-fueled run-up in household net worth that occurred in the lead-up to the Great Financial Crisis, the wealth gains this cycle have largely occurred with limited use of leverage. The household debt-to-asset ratio has actually been continuing the downward trend that has been in place since the forced/involuntary deleveraging in the aftermath of the housing bubble popping in 2008 — the 11.2% ratio in Q22024 is the lowest in the US since 1973 (aside from 2021) in a sign that American households overall are not being buried in increasingly costly debt (the debt-to-income ratio being at 25-year lows aside from the pandemic echoes this sign).
Further to this point, the US owners’ equity share of real estate assets ticked up to 67.0% in Q2 2024, which is its highest level since 1956 (this means that mortgages account for just one-third of the average value of homes across the US). Consumers’ ample equity in their homes, and the long terms of mortgages limiting exposure to rate changes for the majority of US homeowners, have prevented any impetus for a broad wave of selling into a less-than-favorable real estate market, which is a key reason home prices have stayed pretty firm in the US despite higher rates restraining activity.
Moreover, note that while the latest Quarterly Report on Household Debt and Credit from the Federal Reserve Bank of New York indicated that US delinquency rates for credit cards and auto loans have continued to rise against elevated interest rates, there are limited signs of stress in housing-related credit that accounts for the vast majority of household debt — overall loan delinquency rates in the US are at historically benign levels with 1.6% of all outstanding consumer loans 90+ days delinquent in Q2, which, while up from sub-1% levels in 2021, is half the average for the two decades preceding the pandemic.
One last thing I want to flag with the aggregate US household balance sheet dataset is that it shows there are still literally piles of cash on the sidelines.
Household holdings of physical cash, checking and savings deposits, and money market funds in the US totaled US$18.3 trillion at the end of June. For some context, that is equivalent to the estimated size of China’s economy or roughly equivalent to a year’s worth of American consumer spending. That is a massive amount of funds that could be deployed in fairly short order, either for spending or [moved] into financial markets.
The bottom line here is that the data continue to suggest that US households’ financial foundation remains in generally good shape in aggregate. There are signs that some are struggling to keep up with payments on credit cards and auto loans (looming rate cuts should help here), but overall, Americans have high degrees of wealth and low debt, which, combined with a still firm job market supporting cash flows, would appear to be constructive for the consumer continuing to help sustain economic momentum.
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