Household balance sheets in the United States are better off today than before the pandemic. Balance sheets have seen asset growth outpace liabilities as markets have performed well, the labor landscape has been supportive of wage growth, and housing market prices have increased. Additionally, debt ratios have fallen, and household equity has increased. In Europe, while the story is still generally positive as consumers have an elevated level of savings and higher net worth, they also bear a higher debt burden than pre-pandemic.
Household net worth in the U.S. grew by nearly 24% from 2019 to Q321. During this period, household assets jumped 22.0% compared to liabilities only rising 8.9%. The growth in assets came from both financial (i.e., deposits), up 22.1%, and nonfinancial (i.e., real estate), up 21.8%. Household debt/assets in the U.S. for Q321 was 11.0%, the second lowest reading in 30 years, only behind 2Q21.
In Europe, the data has been a bit different. Household gross disposable income increased 4.4% and net worth grew 10.3% since 2019. However, debt as a percent of gross disposable income was 96.6% in Q221, up from 93.3% in 2019. For the U.S., this metric declined from 2019 to Q321 by 40 basis points as income growth was stronger than in Europe. The household savings rate in Europe also declined from its peak of 20.6% in Q121 to 19.1% in Q221, but is still significantly above the 13.1% level of 2019.
In the U.S., total personal income from compensation in November was up 11.2% since 2019. Wage growth should continue to remain strong in the U.S. as job openings are elevated and business surveys indicate earnings growth persistence. Europe’s labor market, on the other hand, has seen a solid recovery in the labor force participation rate and less relief in the unemployment rate. As a result, negotiated wages only rose by 3.7% over the last seven quarters.
Consumer sentiment indices suggest that although balance sheets are sound, the future may not be as rosy. Both the University of Michigan sentiment and European Commission confidence indices are down significantly from recent peaks. This could be partly due to the drop in purchasing power as inflation persists. However, unlike coming out of previous recessions, U.S. household balance sheets don’t need repair. Similarly, in Europe, while debt levels are up slightly, savings and net worth provide a cushion. Altogether, consumer balance sheet strength should support global growth.