It’s widely believed that the biggest issue with U.S. consumers’ balance sheets is indebtedness, but the Federal Reserve’s latest financial accounts – and the volatile stock market – suggest that larger risks may be on the other side of the ledger.
This seems counterintuitive. Household wealth has never been higher, rising some $163 billion in the fourth quarter of last year to a record net $169.4 trillion, as gains in stocks and ‘other’ assets more than offset declines in bonds and home prices, according to the Fed’s latest report.
And when looking at assets as a share of gross disposable income, considered a more accurate barometer of wealth, households have rarely ever been richer.
But cracks are starting to appear in the edifice.
Households directly or indirectly owned $56 trillion worth of stocks at the end of last year, a record amount. As a share of total gross wealth, equity exposure is at a historically high level, and vulnerable to a significant decline if markets slide.
The market is wobbling. With only two weeks left of the current quarter, the S&P 500 is heading for a fall of 4% and the Nasdaq is down 8%. Some $5 trillion has been wiped off the U.S. stock market in the last month, the sharpest dose of wealth destruction since the bear market of 2022.
This has potentially profound implications for a consumption-based economy where the top income decile – the owners of nearly all of the country’s financial assets – is responsible for roughly half of the nation’s consumer spending.
So while it’s famously been said that “the stock market is not the economy,” that may not be strictly true.
Oxford Economics’ chief U.S. economist Ryan Sweet – one of many who have recently cut their 2025 growth forecasts – has warned that household net wealth matters more for the consumer spending outlook than ever before.
“A stronger wealth effect has proven to be a tailwind for overall consumer spending, but it could just as easily turn into an outsize drag in the event of a bear market,” he wrote last week.
He’s right. One of the most remarkable statistics in recent years is that the U.S. economy has grown 50% in nominal terms since the post-pandemic low in 2020, less than five years ago.
Household wealth has played a key role in this via a virtuous cycle of strong consumer spending, high corporate profits, soaring stock markets and resilient economic activity.
But what if one part of that cycle – asset prices – has reached its high-water mark?
What was a virtuous cycle when asset prices were rising could quickly flip to a vicious cycle when they fall. We may already be seeing the beginnings of this. Consumer sentiment is now at a two-and-a-half-year low, University of Michigan surveys show, and tepid monthly retail sales reports are offering reasons to be concerned.
Meanwhile, the other side of the household balance sheet is actually in relatively good shape.
Total nominal debt fell slightly in the fourth quarter to $20.79 trillion, the first decline in nearly five years. And if you exclude a few quarters in the pandemic distorted by government stimulus checks, debt as a share of gross disposable income is now the lowest since 1999. Applying the same criteria, mortgage debt – households’ biggest single debt burden – as a share of GDI is the lowest since 1998.
So overall, debt levels appear relatively low and stable, while asset values are high and primed for a fall.
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