Bolstered Balance Sheets: Assessing Household Finances since 2019

“…This analysis focuses on the evolution of household balance sheets over the course of the COVID-19 pandemic. Balance sheets have been buffeted by many factors, including weakness in labor-market income, strength in federal benefits, increases in asset prices, increases in household debt, and pandemic-constrained consumer spending. In aggregate, the result has been that households’ financial positions in 2022 are significantly improved relative to 2019. Savings held in deposits and other financial accounts have increased, real estate and stock market wealth has increased, and borrower distress has decreased. That improvement in financial strength will be a source of support to the aggregate economic recovery in coming quarters. The overall increase in after-tax and transfer income and the decrease in consumer spending have resulted in an extraordinary run-up in aggregate household savings. Although labor-market income was quite weak early in the pandemic, federal benefits more than compensated overall. In part as a result of relatively strong overall income growth,we estimate that households accumulated $2.5 trillion in excess savings (inflation-adjusted to 2020 dollars) between March 2020 and January 2022, much of which appears to have been deposited in checking and savings accounts.The difference is notable relative to the Great Recession, when income remained below its pre-recession trend for several years..”

Mitchell Barnes, Wendy Edelberg, Sara Estep, and Moriah Macklin, "Bolstered Balance Sheets: Assessing Household Finances since 2019," March 2022, The Hamilton Project, https://www.hamiltonproject.org/assets/files/ES_20220322_householdfinances_finalreport.pdf

“…Figure 11 shows various estimates of the distribution of excess savings that incorporate recent data on spending, income, and wealth. These estimates differ primarily by whether these models assume that the distribution of excess savings matches the pre-pandemic distribution and composition of savings, as the traditional Distributional Financial Accounts (DFA), released by the Federal Reserve, does. The traditional DFA based on historical patterns would suggest the share of excess savings held by households in the lowest two income quintiles to be just 4 percent. Estimates from Moody’s and Morgan Stanley, which more closely follow historical savings distributions, produce results that are similar to the traditional DFA, where roughly two-thirds of excess savings are held by the top income quintile….”

“…The JPMorgan Chase Institute documents flows into and out of 7.5 million active JPMorgan Chase checking accounts, aggregating the accounts across four income quartiles grouped by 2019 income. Figure 10 shows the medianchecking account balances for those quartiles grouped by 2019 income. The distribution of those changes is informative, with the caveat that the families holding those accounts are not representative of the U.S. population; those holding bank accounts and, moreover, those holding bank accounts at JPMorgan Chase over-represent financially secure households relative to the U.S. population as a whole. While outflows from accounts initially fell in early 2020 for each income quartile, that decline was largest and most persistent for those with higher incomes. As a result, checking account balances grew for higher-income account holders even though they experienced temporary declines in inflows. In contrast, spending rebounded for lower-income families and then rose above pre-pandemic levels. Those increases in outflows were more than offset by a surge in DPIs relative to 2019 (Greig, Deadman, and Noel 2021…”

“…Significant changes in labor-market income, government transfers, and the ability to consume goods and services have resulted in remarkably strong savings relative to prepandemic trends. Excess savings during the COVID period is defined as the difference between two measures. The first measure is the difference between actual disposable personal income (DPI) and the level of DPI if it had increased in 2020 and 2021 at the same average pace as over the 2018-19 period (“disposable income contribution” on figure 1b). The second measure is the difference between actual personal outlays and the level of outlays if they had continued at their pre-pandemic pace (“personal outlay contribution” on figure 1b). Because DPI was higher than trend in 2020 and 2021 and outlays were lower than trend (figure 1a), the result is excess savings out of income. From March 2020 through January 2022, elevated incomes contributed roughly $1.3 trillion while spending shortfalls contributed roughly $1.2 trillion to an estimated $2.5 trillion in excess savings held by households in inflation-adjusted 2020 dollars…”