Arguably, the biggest question about the US economy right now is whether consumers can maintain their pace of spending. Student loan payments resume in October. Pandemic-era excess savings are expected to run out as soon as this quarter. The personal savings rate, which was around 9% prior to the pandemic, was 3.5% in July, not far from the all-time lows set in the mid-2000s.
If there’s one reason to remain optimistic on household spending, it’s that the “excess savings” framework doesn't capture the full picture of household balance sheets. Adjusted for income, household net worth remains near a record high. That's driven, importantly, by the surge in home values and home equity levels during the pandemic. Additionally, there’s no reason to think consumers will shift back to the caution and elevated savings rates of 2019 — activity patterns in 2023 are closer to what we should expect going forward.
The capacity of households to spend doesn’t stop when savings built up during the pandemic dwindle back to the pre-pandemic trend. Overall household wealth matters too. In the second quarter of 2023, household net worth stood at 7.75 times the level of disposable personal income, from 7 times in the fourth quarter of 2019, according to last week’s Financial Accounts of the United States report released by the Federal Reserve. Relative to income levels, households are wealthier now than they were at the peak of the dot-com bubble in the spring of 2000 or the peak of the subprime mortgage housing boom in the mid-2000s.
Most of this increase has been driven by the surge in home equity during the pandemic — home equity as a percentage of disposable personal income is above the highs seen in the mid-2000s, and is rising again as home values recover after a brief decline in late 2022.
Unlike stocks, which are held primarily by the wealthy, home equity is a middle-class phenomenon with two-thirds of American households owning their homes. And while home price expectations grew pessimistic last year in response to rising interest rates and worries about a housing market decline, they have been on the rise again this year, according to the New York Fed’s Survey of Consumer Expectations. Households have a lot of housing wealth and feel confident that their homes will continue to appreciate in the future.