US growth spurt expected as Americans feel free to borrow
Pandemic-related shifts, such as rocketing house prices, are set to undo the effects of the 2008 crisis and usher in renewed expansion
Investors are concerned that the US is headed for a repeat of the lacklustre economic expansion of the prior decade: that once the country gets past reopening pains, it will resume the same modest-but-steady growth that was interrupted by the pandemic.
The plunge in 30-year Treasury yields last week after a hawkish turn from the Federal Reserve only heightened the sentiment. But that view overlooks a key factor that held back the economy in the 2010s and that should now boost it through the 2020s: household balance sheets. Americans are richer than ever before thanks to a booming stock market coupled with a surge in home values. And households aren’t burdened with the same level of debt that dragged on spending in the years following the 2008 recession. That should mean faster growth in the years to come as Americans again feel free to borrow.
Between the end of 2019 — before Covid-19 hit the US — and the first quarter of 2021, household liabilities rose 5%, or $820n. Household assets, though, rose by 14.8%, or almost $20-trillion. That’s the kind of balance sheet calculations that should put households in a spending mood once they’ve put pandemic fears behind them.
The rise in leverage that restrained economic growth in the 2010s began in the early 1980s. As interest rates declined, households increased their debt faster than they grew their assets, and that trend continued for 25 years. Then, as home prices fell in the late 2000s, Americans’ assets — houses and stock holdings — lost value while their debt levels stayed the same or increased, producing even more highly leveraged households. It took many years after the 2008 recession for Americans to pay down all that debt and repair their balance sheets.
But what started as balance sheet repair has now turned into something else, in large part due to pandemic-related shifts. Home prices have skyrocketed over the past 18 months and the stock market has risen to record highs, inflating the asset side of household balance sheets. The personal savings rate has also been elevated historically because of a combination of fiscal relief measures passed by Congress during the pandemic, and a lack of spending on activities such as travel and dining. The net effect is that by the end of the first quarter of 2021, the ratio of household assets to liabilities is close to a 50-year high, and continued strong gains in home values and stock prices in the second quarter of 2021 should push it even higher.
While there’s surely some sort of distributional tilt to this metric — we know how much the net worth of billionaires rose last year — the surge in home values means a lot of middle-class homeowner wealth has been built or restored as well. Even for the bottom tiers of the household net-worth distribution, wage growth is surging, and child tax-credit payments included in the American Rescue Plan begin going out in July, so there’s a reasonable amount of inclusiveness here.
It’s possible households continue to improve their balance sheets indefinitely, but there’s more likely to be a limit to it, with Americans feeling confident enough to take on more debt in the years to come. Household deleveraging has been happening for more than 12 years now; scars from the 2008 financial crisis eventually fade, or in the case of the youngest generation entering the workforce, may not exist at all. We’re already seeing homeowners beginning to take equity out of their houses again (though nowhere near the level we saw in the mid-2000s at the peak of the bubble).
The oldest members of the Baby Boomer generation are now over 75 and will find themselves drawing down their savings and selling their assets in the years ahead. Millennials looking to buy houses will find themselves taking on debt like generations before them. Low interest rates make debt management easier than ever.
The prospect of more household borrowing and spending driven by strong balance sheets and a wealth effect should mean faster overall economic growth, particularly as businesses look to hire and invest in new capacity in response to a more robust demand environment.
It may take a while for people to get their bearings in the post-pandemic world, assess their newly-flush financial situation and change their spending behaviour, but it’s a scenario that makes sense for a lot of American households. It won’t mean the borrowing excesses of the mid-2000s, but perhaps something more like the 1980s and 1990s.
Bloomberg Opinion. More stories like this are available on bloomberg.com/opinion
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