American consumers' pandemic-era wealth flattens, study finds
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Consumers fell behind on debt payments as pandemic-era wealth disappeared, leaving some households in worse financial shape as the economy slows.
- That's the takeaway from a new study by economists at the San Francisco Fed that shows how wealth built up during the pandemic helped support consumer spending in the face of high rates and inflation.
Why it matters: Now that "extra" wealth is gone, the opposite is the case: Spending is cooling, and many consumers have a smaller cushion to fall back on if the economy enters a recession.
The big picture: Households accumulated more liquid assets — cash, checking and savings deposits and money market funds — when the pandemic hit than otherwise would have been the case. That happened across the income spectrum but was most pronounced among the richest 20% of consumers.
- The top 20% collectively hold double the amount of liquid wealth as the bottom 80%, according to the paper authored by San Francisco Fed economists Hamza Abdelrahman, Luiz Edgard Oliveira and Adam Shapiro.
By the numbers: At the peak in 2021, the top 20% of households by income accumulated $1 trillion more in liquid wealth than would have been the case absent the pandemic, according to the San Francisco Fed.
- Middle and lower-income Americans, or the bottom 80%, built up an additional $270 billion in liquid holdings.
The intrigue: Low- to middle-income households saw this extra wealth drained by late 2021, the economists estimated. But it didn't dry up for the rich until a year later.
- The fact that it lasted longer was likely helped by the fact that they plowed money into higher-interest-bearing assets.
- "The top 20% of households invested more in money market funds around the same time that interest rates were going up, so they benefited more than other households from the high interest rate environment," Abdelrahman tells Axios.
What to watch: As of the beginning of 2024, liquid wealth for the rich was 2% lower than its pre-pandemic path. The bottom 80% have roughly 13% less, the economists said.
- As these funds depleted, household debt rose, as did instances of missed credit card payments.
- Delinquency rates for lower- to middle-income households topped pre-pandemic levels in late 2021, the same time pandemic-era liquid assets disappeared — and a year earlier than the top 20% hit the same milestone.
The bottom line: "Smaller financial cushions and heightened credit stress for households at the bottom 80% of the income distribution pose a risk to future consumer spending growth," the economists wrote.
