U.S. Household Wealth Surged Despite Covid-19

U.S. household wealth has grown by $20 trillion since the fourth quarter of 2019, according to an analysis by ING’s chief international economist, James Knightley. From the equity market trough in March last year, wealth has increased $26 trillion thanks to massive support from both the federal government and the Federal Reserve.

Total assets at the end of 2019 stood at $134.3 trillion, then plummeted to $127.8 trillion at the end of March 2020. Total assets subsequently rebounded on the back of stimulus packages and relief payments: Despite the lockdowns brought on by the pandemic, the U.S. household balance sheet improved to $154.2 trillion in the first quarter of 2021, Knightley wrote, citing Federal Reserve Flow of Funds data.

Nonfinancial assets—mainly real estate—now total $44.6 trillion, while financial assets total $109.6 trillion. Here are the largest categories: 

• Pension entitlements: $29.9 trillion
• Corporate equities: $28.2 trillion
• Small-business equity: $13.1 trillion
• Mutual funds: $11.6 trillion
• Time and savings deposits: $11.2 trillion

Liabilities are “just” $17.2 trillion, Knightley wrote, and are primarily mortgage and consumer loans, which leaves household net worth at $136.9 trillion. This is equivalent to 620 percent of U.S. GDP. 

The Rich Get Richer

Knightley’s analysis found that the biggest contribution to financial wealth gains came from corporate equities and mutual funds, mainly owing to resurging risk appetite and equity markets rising on unprecedented Federal Reserve and government stimulus. These factors also account for strong performance for pension and life insurance funds, he said. Conversely, the value of debt security holdings has actually fallen. 

Higher-income and wealthy households are the main beneficiaries of the increases in wealth, since they were heavily invested in these asset classes already, according to Knightley. Moreover, higher-income and wealthier households spend proportionately more on services and “experiences”—such as travel, eating out, theater, and cinema—which pandemic containment measures curtailed. This likely led to a significant increase in unplanned saving among wealthy households, who put the money instead into financial and physical assets. 

Knightley also identified a substantial increase in wealth in cash, checking accounts, and savings deposits. Given extraordinarily low interest rates, this was overwhelmingly due to people putting more money into these accounts—up $2.7 trillion since the first quarter of 2020 and up $3.2 trillion since the fourth quarter of 2019. 

Low-Income Households Also See Improvement

Lower-income households also contributed significantly to the increase in wealth, Knightley found. Government stimulus checks of $1,200; $600; and $1,400—combined with up-rated and extended unemployment benefits—contributed to huge increases in household income over the past 14 months. 

He noted that, according to an NBER paper, 69 percent of unemployment benefit recipients actually earned more money being unemployed than when they were working. Median recipients received unemployment benefits equivalent to 134 percent of their previous after-tax compensation. 

Opportunities for spending were limited because of pandemic restrictions, so it is likely that not all of these income gains have been spent, Knightley wrote. Indeed, outstanding credit card balances are currently at four-year lows, according to monthly data he analyzed, suggesting that some consumers paid down credit card debt. 

He said more savings were likely accumulated as well. 

Spending Ammunition 

Consumer confidence has strong underpinnings as employment gradually comes back and evidence of higher income growth accrues, Knightley wrote. 

People will have more options to spend money as the economy reopens, with the massive accumulation of wealth only adding to the potential spending ammunition of the household sector. 

Knightley said that in an environment where supply constraints persist, one can argue that the demand growth in the economy is likely to outpace the supply-side capacity. And this is another argument for inflation staying higher for longer.

From: ThinkAdvisor