Net worth of households down in 1Q from record high levels, due to losses on the markets. The balance sheets of households and businesses remain solid nonetheless, and no imbalances are evident on the debt front.
The Federal Reserve’s release on the Financial Accounts of the US in 1Q 2022 reports the first decline in the net worth of households since the beginning of 2020, a downtrend that should continue in 2Q as well due to the downturn on the markets.
Debt held by households and businesses increased, but remains at contained levels in relation to wealth, therefore is no reason for concern.
The balances sheets of household and businesses remain solid, and no financial imbalances are evident. This will be of help
- in a phase in which the erosion of purchasing power caused by inflation is prompting households to draw from their savings and step up consumer credit
- and in which higher cost of debt is generating restrictive effects on investments.
Net worth of households down from record highs
In 1Q 2022, the net worth (assets minus debt) of households decreased for the first time since the beginning of 2020. After growing at a sharp pace for seven quarters, the 0.4% decline seems modest (-544 billion dollars from 4.86 trillion in the previous quarter) and leaves net worth at 149 trillion dollars, just below the record highs set at the end of 2021.
The drop was due to the performance of the market, while the value of real estate (that accounts for 25% of overall assets) kept increasing.
The correction of the stock markets, that continued in 2Q, should again impact the net worth of households negatively. This represents a headwind for consumption, while in the past few quarters the increase in net worth supported the trend of consumer spending, despite the slowdown in real income growth.
On the liability side, debt increased further: in the previous quarters, debt growth had been driven by mortgages, whereas in 1Q consumer credit accelerated. Rising inflation pushed households to draw from their savings (the savings rate has dropped to its lowest since 2008) and to resort more to consumer credit to support spending. This factor should be watched, as it signals that a part of households have exhausted the savings accumulated during the pandemic.
On the other hand, the overall level of household debt is not reason for concern at present: while on the rise in relation to disposable income, the increase was limited and placed debt at just above pre-Covid levels (i.e. at 2017 values, in line with 2002 levels).
The data released are consistent with the statements made by the Fed, that continued to define the state of household balance sheets as solid. The lack of evident financial imbalances is reassuring, although the contraction in the financial wealth of households must be stopped.
Debt/GDP: debt growth picking up
The growth of overall debt in the USA accelerated in the quarter (10.2% q/q ann. from 8.2%). Debt increased also in relation to nominal GDP, to 349%, interrupting the downtrend observed from the peak of 393% hit in 2Q 2020, and rising to 24 percentage points above the pre-pandemic readings.
Debt growth accelerated across sectors, led by the Federal Government (15%), followed by the financial sector, businesses and households (8.3%).
In relation to GDP, Federal Government debt, while down from the pandemic peak, remained at high and increasing levels in the quarter.
The ratio of (marketable) Treasuries and GDP also rose, to 95%, staying lower than the pandemic peak of 102%, but still well above pre-Covid levels (77%). The CBO’s estimates point to at least a reduction of the public finances deficit this year, from -12.4% in 2021 to -4.2% (and to further drop in the two following years), due to higher revenues and lower spending as a result of the expiration of the fiscal stimulus programmes introduced to fight the effects of the pandemic.
Reduced issuance needs compared to 2021 will be of help to prevent excessive supply of Treasuries in a phase in which the Fed is tapering its asset purchases.
In fact, the major holders of US government bonds, behind foreign investors (33%), are the Fed (with a share of 24%, set to decrease), followed at a distance by investment funds and pensions funds, banks, and households.
Debt held by businesses resumed growing at a brisk pace in 1Q. Financial leverage (i.e. the ratio of debt and earnings) also increased in the quarter, while staying at below-trend levels and lower than before the pandemic, due to surging earnings over the previous quarters.
The solidity of the assets if businesses is also confirmed by the comparison between debt and net worth: the ratio dropped to the lower end of the range outlined over the past 12 years, and remained virtually stable in the quarter.
At the same time, the real and financial assts of businesses remain close to peak levels, and the liquid assets held also remain historically high.
Businesses: earnings and investment
The absence of evident financial imbalances on the debt front is reassuring. However, the increase in the cost of debt, after two years of extremely low interest rates, represents a restrictive factor for business investment.
Businesses sharply stepped up investment thanks to low rates and accelerating earnings. However, earnings growth has slowed recently, and earnings are at risk of being revised down in the coming months.
Based on data on flows, the financing-gap has returned into positive territory, signalling that the margin for self-financing (investment financed exclusively by using own means) has decreased. Going forward, recourse to external financing, at higher rates, represents a headwind for investment growth.