The average consumer’s household finances aren’t in as good as shape as they were, but Deutsche Bank economists still think consumers have enough buying power to keep the economic recovery chugging along steadily. Their recent study supports findings from another firm that also suggested consumers are doing pretty well. In February, Goldman Sachs concluded that the U.S. consumer is in good shape as the personal saving rate was still high even though economic growth in areas that affect consumers is slowing.

Buying power still “relatively robust”

DB Chief U.S. Economist Joseph LaVorgna and team looked at household finances from various angles to gauge how U.S. consumers are doing economically, the first of which was buying power. They report in their March 23 quarterly update on household finances that  in general, consumers’ buying power worsened “slightly” over the course of last year. However, they also said their ability to spend is still “relatively robust,” adding that consumer spending will probably continue to be the economy’s steadiest section.

In measuring the buying power part of household finances, the Deutsche Bank team looks at cash flow changes and borrowing ability. Greater buying power fuels consumption as consumers either spend out of their cash holdings or borrow (or use credit cards, etc.) to pay for bigger expenditures. They don’t factor in financial assets because they see little evidence that consumers borrow against them meaningfully.

Jobs, payroll growth slowed in 2015

LaVorgna and team found that cash flow deteriorated slightly last year because job growth declined compared to 2014. They report a $611 billion increase in personal income and a $146 billion increase in tax payments. After including small increases in mortgage and non-mortgage interest payments, they found that household cash flow climbed $451 billion last year. The DB team added that this is much less than the $581 billion gained over the course of 2014, citing slowing job growth as one of the main reasons.

The U.S. economy added 2.7 million jobs last year, compared to 2014’s 3 million jobs. Further, non-farm payrolls peaked in February 2015 at 2.3% but has retreated to 1.9% as of last month. They do note though that the unemployment rate has fallen under 5%, so “Excess labor slack has mostly been absorbed at this point in the business cycle. Hence, the onus is now on wage gains to support consumer spending going forward.”

Consumer credit levels remain steady

Moving on to the credit aspect of household finances, LaVorgna and team said that, excluding student loans, consumer credit climbed $111 billion year over year in the fourth quarter.

household finances

Homeowners’ equity, which they note is heavily influenced by home prices, climbed by about $1.2 trillion in 2015 but has decelerated since 2012. They cite the slowing pace in home price appreciation, as prices appreciated 5.3% last year compared to 11.7% in 2013. They expect home prices to keep rising although growth in them to slow a bit, which they said should “still produce a healthy increase in homeowners’ equity.

household finances

Buying power up $1.73 trillion

The DB team said that after taking buying power and changes in consumer credit and homeowners’ equity into consideration, they calculate that buying power climbed $1.73 trillion last year, marking a slight deceleration from 2014’s $1.79 trillion increase. Despite the deceleration, they said the last few years have been good for consumers’ household finances, which should enable consumer spending to support the “otherwise fragile economic backdrop.”

“Given the consumers’ disproportionate weight in the overall economy—consumer spending accounts for 70% of expenditures-based-GDP—households will need to do the yeoman’s work to keep overall GDP growth afloat,” LaVorgna and team wrote.

household finances – Liquid assets compared to liabilities declining also

Another aspect of household finances is the liquid assets to liabilities ratio, which the DB team said suggests that household balance sheets deteriorated “modestly” last year. They attribute this to equity price declines in the second half of 2015. Despite this slight deterioration, they think the last few years’ improvements in household finances should help support “further modest stock market weakness.”

household finances

They note a correlation between the S&P 500’s level at the end of each quarter and assets in mutual funds, adding that equity prices have already recovered from their low point in the middle of February. Further, even if stocks fall by more than 10% and plunge back to February’s lows, the liquidity assets to liabilities ratio still would only fall to 2.29, remaining above the long-term 2.12 average.

household finances

“Consequently, it would take a substantial shock to equity valuations for household fundamentals to meaningfully deteriorate, they conclude. “It follows that consumer spending growth should remain reasonably robust.”