How are American Household Balance Sheets looking? Not too bad according to some recent numbers

At the end of August, figures from the US Commerce Department showed a worrying trend among consumers: Average household savings has plummeted by nearly half in two years.

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In June, the personal savings rate was 3.8%, down from 2015, when households were putting away 6.3% of after tax-income on average, according to Commerce’s Bureau of Economic Analysis. Falling savings rates at a time when the jobless rate is at a historically low 4.4%, and weekly earnings growth hit 2.5% in August, could point to problems ahead according to some economists. From the second quarter of 2015 to the second quarter of 2017, personal disposable income increased an average of 2.8% a year while consumer outlays rose about 4% a year according to the Bureau of Economic Analysis, indicating that rising prices may force the US consumer to cut back on spending.

Consumer spending is the lifeblood of the US economy, and any slowdown would almost certainly impact economic growth. According to Oxford Economics analysis, consumption makes up about 70% of economic activity and based on current trends, inflation-adjusted consumer spending, which has been running at a rate of around 3% per annum for the past three years, could slow to 2% in Q3.

However, while consumer spending could be set to fall, analysts at Capital Economics note that consumers' balance sheets are still in much better shape than they were before the financial crisis.

Household Balance Sheets Remain Robust 

Even though the weighted average savings rate in the "G4" advanced economies was only marginally above the pre-crisis low of 9.6% in Q1 ( Q1 rate: 9.8%) falling savings rates have not been accompanied by a rise in debt --  as shown in the chart below.

Further, ultra-loose monetary policy has helped to keep the ratios of debt-servicing costs to income well below pre-crisis levels at an average of 7.8% compared to the pre-crisis peak of 10%. Household balance sheets have also improved since the crisis with net financial assets rising from a 2008 low of 280% of income to 390% in 2016.

Household Balance Sheets