Households’ Covid-era liquid wealth has ebbed, leaving historic debt

A newly published study by the Federal Reserve Bank of San Francisco reveals that the substantial liquid wealth US households sopped up during the pandemic has run out, particularly for those in the lower- and middle-income bands of the economic spectrum.

That depletion is leading to an increase in credit card delinquencies, the bank said, raising concerns about the future of consumer spending and economic stability.

According to the research published Monday, households across income levels saw a surge in liquid wealth—cash, checking and savings deposits, and money market funds—due to government support and changes in spending behavior during the pandemic.

However, the study shows that this financial windfall has been spent, with significant differences between income groups.

Higher-income households, which represent the top one-fifth of the income distribution, experienced the most significant increase in liquid wealth. By early 2021, these households had accumulated 11 percent more liquid assets – a $1.1 trillion surplus, the bank calculated – than projected in a "no-pandemic" scenario.

"Higher-income households held pandemic-era liquid wealth until mid-2022," the report stated.

Meanwhile, middle- and lower-income households, which occupy the bottom four-fifths of the income distribution, saw a smaller increase in liquid wealth, peaking at an additional 6 percent above pre-pandemic expectations. According to the report, these households used up the entirety of that pandemic-era windfall, an estimated $270 billion, by late 2021.

Focusing on money market funds, the research estimated that higher-income households had one-fourth of their total liquid wealth in those short-term interest-bearing investments, compared to just over one-eighth for middle- to lower-income households.

Holdings in money-market funds began rising in 2022, it said, as interest rates started to rise. That movement accelerated in 2023 as households seized on the chance to earn higher yields compared to many traditional checking and savings accounts available at the time.

“This trend is especially true for the top households by income, whose investments in money market funds have grown to more than 30% above what would have been expected in the absence of the pandemic,” the paper noted.

Fast forwarding to the first quarter of this year, the paper estimates higher-income households now hold 2 percent less liquid wealth than the pre-pandemic projection. Middle- and lower-income households, meanwhile, had thirteen percent less liquid wealth compared to projections from before the pandemic.

“The recent drawdown in liquid assets has coincided with an increase in household debt,” the paper said, noting how that debt has increased over the past few years to hit all-time highs based on data from the Federal Reserve Bank of New York.

Credit card delinquency rates have now surpassed pre-pandemic levels across all income groups, the paper said. Middle- and lower-income households appear to have been hit hardest, with delinquency rates in that cohort now sitting about three percentage points above late-2019 levels.

The report highlights that while higher-income households have recently stabilized their financial situation by reallocating funds to money market accounts, "delinquency rates for [middle- and lower-income] households grew more substantially and more rapidly than [for] high-income households."