What's really going on with consumer balance sheets?

Since I spend my working hours in a business that is focused on consumer finance with particular focus on consumers who have excessive debt, many people often ask me what I think about the financial strength of the consumer and how consumer finances might contribute to a recession or "soft landing". Since COVID, most published media on consumer financial strength has referenced the consumer savings rate, which spiked significantly during COVID as a result of stimulus, reduced consumption and non-cyclical savings driven by the workforce shift to hybrid and remote opportunities. While the savings rate is a useful indicator on where consumers' excess cash is going, as a?rate of savings?it does not provide an indication of?how much cash?is being saved and?what the cash build up?looks like.

Earlier this week, various media outlets reported that "new data" shows that consumers have saved more cash than previously thought. The new data says that the 2020 savings rate was 15.4% and the 2021 savings rate was 11.4%. Both are whopping numbers.?

When I saw this new data report, it made sense to me because I have focused on the Fed's reporting of Currency and Checkable Deposits, which tracks?how much cash?is sitting in checking accounts and?how those balances are growing or shrinking. By looking at these alternative data points, the consumer has always appeared in a much stronger and more sustainable position because the average US consumer has been sitting on multiples of cash relative to pre-COVID levels. We now know, based on the recent report, that these balances were built up with much higher average savings rates.

The above charts show how Currency and Checkable Deposits have evolved for the Bottom 50% of households (top chart) and the Top 50% of households (bottom chart).?As of August 2023, the Bottom 50% of households, have approximately 2.5x more cash availability than they had in January 2020. The Top 50% have over 3.5x more cash availability than they had over the same time period. We can see that both groups are consuming that cash now, starting in June 2022 for the bottom 50% and in October 2022 for the top 50%.?

By looking at these data points, we see on average the US consumer balance sheets are still strong with a long runway before returning to pre-COVID cash levels. Now, with that said, it's important to remember that these are averages across all households and the sustainability of the cash levels is going to vary by decile of wealth. This means that the erosion of cash will flow from the bottom up, which has occurred already with the bottom 50% turning to negative growth before the top 50% (June 2022 vs. October 2022) and less wealthy households may feel a recession while the rest of the economy is still looking relatively stable.

While there are many other factors to consider when forecasting a recession or "soft landing", my sense is that consumer balance sheets are not going to be a significant driver of the economy slow down for another year, possibly two, and other economic factors, such as hiring, wages relative to inflation and industrial output, will play a bigger role in driving an economic slow down.