The resilience of U.S. consumers amidst sustained high borrowing costs has recently shown signs of strain, yet their economic footing remains solid, buoyed by soaring household wealth. Federal Reserve data reveals that U.S. households’ net worth surged by an impressive $5 trillion in the first quarter of the year, reaching a record $161 trillion. This substantial increase was primarily driven by rising equity prices, while concurrently, household debt as a percentage of GDP declined to its lowest level in 23 years.
Despite the challenges posed by elevated credit card and mortgage rates, the equity market performance has provided a significant counterbalance. Both the S&P 500 and Nasdaq indices have posted gains of 5% and 9%, respectively, in the second quarter of the year. These positive movements underscore the continuing wealth effects, which are pivotal in sustaining and driving economic growth through consumer spending.
BNP Paribas economists have conducted an insightful analysis predicting that higher stock and real estate prices will contribute approximately $246 billion to consumer spending in 2024. This boost is expected to add around 1 percentage point to GDP growth for the year, marking one of the most substantial contributions to U.S. consumer demand in the past 25 years.
Consumer balance sheets are notably robust, characterized by reduced debt burdens since the recession of 2008-09. Household net worth remains notably high relative to liabilities, providing a favorable financial backdrop that supports ongoing economic resilience and consumer confidence.
The Federal Reserve’s comprehensive update on U.S. household finances further underscores these trends. Of the $5.12 trillion increase in total net worth during the first quarter, $3.83 trillion stemmed from corporate equity gains, while real estate contributed an additional $907 billion. This robust performance in equity-driven wealth accumulation highlights the broader economic impact of a thriving stock market on household wealth.
However, the distribution of this wealth is uneven, with the wealthiest 1% of households owning approximately 50% of equity wealth, and the top 10% holding about 90%. Despite this disparity, aggregate consumption continues to expand, driven largely by the spending patterns of affluent households.
An analysis by Ned Davis Research indicates that household exposure to stocks has never been higher, with stock holdings accounting for a record 34.5% of financial assets in the first quarter. While concerns persist about the implications of fully invested households in an environment of potentially high market valuations, the overall positive wealth effects from recent years suggest that any correction would need to be substantial to significantly impact consumer sentiment and spending.
Looking ahead, despite potential headwinds such as adjustments in consumer spending patterns and the broader economic environment, U.S. consumers appear well-positioned to navigate through current challenges. With substantial gains in household wealth and ongoing support from equity markets, consumer resilience remains a cornerstone of economic stability and growth prospects in the near term.