By James Knightley, Chief International Economist
The sharp falls in stock markets during the first half of 2022 have significantly reduced household wealth, but we must remember the significant gains of the last two means it is still up $27 billion from pre-pandemic levels to currently stand at $144 billion. This will provide a solid platform for consumers to weather intensifying economic headwinds.
Falling stock prices affect household wealth
The economy and job market in the United States have rebounded strongly over the past two years, recovering all the production and jobs lost during the pandemic. Asset markets performed even better. National house prices are up more than 40% from pre-pandemic levels, while the S&P500, even after recent declines, is up about 20% from that same point. and is up over 80% from its March 23, 2020 low.
Nevertheless, the technical recession in the first half of the year and concerns about growth prospects and corporate earnings have put stock prices under pressure lately. It is this, combined with an increase in mortgage debt, that led to a $6.1 trillion decline in household wealth in the second quarter.
The value of financial assets held by the household sector fell by $7.3 billion. $6.7 billion of the decline was in directly held company stocks and mutual fund stocks, and another $1.3 billion was pulled from the valuation of pension and insurance funds. Wealth held in non-corporate debt securities and stocks rose slightly, while there was a slight $129 billion decline in holdings of cash, checks and savings-term deposits.
Non-financial assets held by the household sector continue to grow, increasing by $1.6 billion in value during the quarter. This is primarily real estate, but also includes things like cars, jewelry, and equipment. To round out the balance sheet, liabilities increased by $363 billion due to higher mortgage borrowing and consumer credit.
Cumulative change in household assets since the 4th quarter of 2019 billions of dollars
Household wealth continues to rise massively from pre-pandemic levels
While this drop in wealth isn’t exactly good news, it has to be weighed against the huge net gain of $27 billion in household wealth from the pandemic as a whole. Even after the drop in the second quarter, net worth stands at $144 billion.
Massive fiscal and monetary stimulus – $5 billion in direct payments to households through stimulus checks and extended and increased unemployment benefits, plus another $5 billion in quantitative easing played a huge role. The same goes for the involuntary savings caused by the movement restrictions imposed during the pandemic. The result was that money that would have been spent on goods and services ended up being channeled into financial and non-financial assets.
Assets and liabilities as a percentage of disposable income (1950-2022)
Strong balance sheets will help the United States weather the economic storm
As recessionary forces intensify both externally through the European energy crisis and weaker Chinese activity, and internally via higher interest rates, a strong dollar and a slowing housing market, the consumer will play a huge role in the duration and depth of any downturn. Fortunately, the labor market remains strong with more than two vacancies for every unemployed American, while today’s wealth figures suggest the household sector is in a fundamentally strong position – cash balances look particularly good .
As a proportion of disposable income, household assets are 880% while liabilities are “only” 102%. This is a much better position than any previous recessionary environment and means the consumer sector should be better able to weather intensifying economic headwinds. Therefore, we remain hopeful that a likely recession in 2023 will be modest and short-lived assuming a quick easing of monetary policy from the Federal Reserve.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.