Household Finances Look Good: No Excesses Here

Figures on household finances paint a picture of remarkable health and, what is more, good cause for optimism about the general economy, at least from this quarter. Real incomes have expanded fast enough to allow households to sustain historically high savings rates, even as families have increased their spending on goods and services. Balance sheets have improved, dramatically in some respects, with asset growth far outpacing that of liabilities. If the economy faces the kind of excesses that threaten the expansion’s durability, they most certainly do not exist in the household sector.
Behind much of this improvement lies the acceleration of household incomes. Real after-tax incomes have expanded steadily at a 2.3% annual rate over the last 20 months or so, a marked step up from the 1.7% growth in 2016. To be sure, real income growth earlier in this expansion did match this more recent accelerated pace, but such growth early in an expansion is typical. What is remarkable and particularly encouraging about this recent strength is that it has arrived even as the expansion has matured. What is still more encouraging is how employee compensation has led the overall advance in incomes. Wages and salaries in the private economy and proprietors’ incomes have risen at more than twice the pace of government supported incomes, whether transfers or the wages and salaries of government employees. The difference is not to designate one source of income as superior to another but rather to show clearly that the recent income growth reflects economic activity and does not spring from an artificial support engineered in Washington, as was the case earlier in this expansion.
Most important to the expansion’s durability is how households have used a good portion of their income growth to strengthen their savings. To be sure, real consumer spending has increased at a 2.3% annualized rate during these past 20-some months, a significant support for the general economic expansion. But the strong income growth has allowed households to increase their base of savings by more than $1.0 trillion a year during this time, a flow that amounts to some 6.8% of their after-tax income. This rate of savings is entirely comparable to the historically high savings rate households had understandably adopted after the shocks of the 2008-09 crisis. Between 2010 and 2016, families saved some 7.2% of their after-tax income flows. This was an impressive rise from the 4.8% averaged in the prior ten years and especially the 3.5% savings rate averaged in the three years leading up to the crisis. Indeed, that paltry rate of thrift both helped create the crisis and then exacerbated it by rendering households unable to cope with the financial stains as they developed. That families, even now after years of expansion, retain a robust rate of savings suggests strongly that they and the economy have good defenses against a recurrence of those hard times.
This level of thrift, as well as improving financial markets, has bolstered household balance sheets dramatically. During the 18 months through this past spring quarter, the most recent period for which data are available, the Federal Reserve reports that financial assets held by households have grown at over an 8.0% annual rate. Of course, the impressive rise in the stock market has contributed meaningfully to this gain. The value of household equity holdings has risen at about a 20% annual rate, from net buying as well as price gains.  But the asset rise has come from more than equities. Cash holdings have grown at an annual rate of almost 7.0% during this time, while the value of owner-occupied housing, by far the biggest line item on household balance sheets, has grown at over a 6.5% annual rate.
Still more important, families have used their robust savings flow to contain the growth of their liabilities. Overall, household liabilities have grown at a modest 3.6% annual rate during this recent period. Consumer credit has expanded at only a 4.8% annual rate, actually slower than averaged in the 2014-16 period, while mortgage debt has increased at only 2.8% a year. This last fact should offer significant comfort to those haunted by the possibility of a recurrence of the 2008-09 crisis. As a consequence of all these trends, household net worth has increased at an annual rate approaching 8.3% during this time, far faster than the 6-6 ½% rate averaged previously. Perhaps more telling, assets overall at last measure stand some 7.6 times the size of household liabilities, up from 7.3 times in 2016 and barely 5.5 times in 2010. On average, Americans own about 60% of their home, well up from 56% in 2015 and a vast improvement from the prevalence of underwater mortgages in 2009 at the close of the crisis.
Originally published on

Back To Blog