Column-Far from strained credit, US household wealth is growing: McGeever From Reuters

By Jamie McGeever

ORLANDO, Florida (Reuters) – U.S. consumer resilience to prolonged high borrowing costs has shown signs of wilting recently, but barring a deep downturn in the labor market, rising household wealth should ensure it does not cracks.

Figures from the Federal Reserve show that the net worth of US households rose by $5 trillion in the first quarter to a record $161 trillion, largely due to rising stock prices, while household debt as a share of GDP fell at the lowest level in 23 years.

While ‘higher for longer’ credit card and mortgage rates are reducing consumer power somewhat, the Nasdaq is up 5% and 9%, respectively, so far in the second quarter.

This suggests that wealth effects remain positive and the economy will continue to enjoy and be driven by consumption-led growth. If a soft landing is achieved, it will be thanks in no small part to the tireless consumer.

In an in-depth analysis last month of U.S. consumer wealth, BNP Paribas ( OTC: ) economists predicted that higher stock and home prices will boost consumer spending by $246 billion this year, providing a ” considerable” for the economy.

That would be the third-largest increase in US consumer demand in 25 years, they think, and would add roughly 1 percentage point to GDP growth for the year.

“The consumer balance sheet is very healthy. Americans have significantly reduced their debt burden since the 2008-09 recession. Household net worth remains elevated relative to liabilities, — a favorable financial backdrop,” they wrote.

ACTIVITY RECORD, EXPOSURE RECORD

The Federal Reserve’s quarterly update of its ‘Financial Accounts of the United States’ database earlier this month confirmed the growing strength of American household finances. Granted, they are broad numbers and fail to capture any distributional breakdown, but they are instructive nonetheless.

Of the $5.12 trillion increase in total net worth in the first quarter, corporate equity accounted for $3.83 trillion and real estate accounted for $907 billion.

Real estate may be a bit of a surprise, given that average home prices fell 0.6% in the period, but the equity-oriented component is not – at the aggregate level, a rising tide on Wall Street is lifting all domestic ships.

Analysis from Ned Davis Research shows that households’ exposure to stocks has never been higher – holdings of stocks as a share of financial assets hit an all-time high of 34.5% in the first quarter.

The distribution of this property is very unequal, with the richest 1% in the country owning 50% of capital wealth and the top 10% owning around 90%. But overall, consumption is still rising as wealthier households account for the lion’s share of retail sales in dollar terms.

This level of exposure to stocks raises legitimate concerns that households are fully invested in high valuations. The pain from a correction on Wall Street could be felt more widely than usual.

But it would take a pretty big pullback to wipe out the positive wealth effects of recent years. Last year alone, equity appreciations added $7.39 trillion to total household net worth.

Zooming in further, household net worth has increased by about $40 trillion since the pandemic, Fed data shows. Even adjusting for inflation, that’s still a staggering $19 trillion increase, analysts at Barclays estimate.

$500 billion DIVIDEND

On the other side of the balance sheet, meanwhile, household debt as a share of GDP fell to a 23-year low of 71.1% in the January-March period from 71.3% in the fourth quarter of last year, the latest figures show. of the Fed.

Households’ share of total US debt in the first quarter stood at 27% – the last time it was lower than in 1956.

“With such a large headwind behind them, it is difficult for us to see consumers pulling back significantly in the absence of a large exogenous shock,” Barclays analysts Ajay Rajadhyaksha and Amrut Nashikkar wrote on Thursday.

While some analysts estimate that the pool of excess household savings built up after the pandemic has dried up, Rajadhyaksha and Nashikkar think it still stands at a not-insignificant $850 billion.

Additionally, money market fund balances have returned over $6 trillion, of which $2.45 trillion are from retail investors, according to the Investment Company Institute. That’s a lot of money earning about 5% or more.

Apollo Global Management (NYSE: ) Chief Economist Torsten Slok calculates that the high interest rates money market funds are currently paying on deposits equates to about $500 billion in dividends for American households.

This is about 2.5% of annual consumer spending.

“In other words, Fed hikes are boosting consumer spending through higher money market fund dividends,” Slok says.

In short, consumers and Wall Street have so far resisted the Fed’s most aggressive rate hike campaign in 40 years, which has ended with interest rates at their highest in years.

Viewed through the prism of household balance sheets and broader wealth effects, these foundations may be strengthening rather than weakening.

(The opinions expressed here are those of the author, a columnist for Reuters.)

(By Jamie McGeever; Editing by)