043: Analyzing the Uptick in Household Net Worth and Rising Debts

Did you know that despite a volatile economy, household net worth has been able to bounce back to a record high? In this episode of Markets with Megan, Megan dissects the recent data from the Federal Reserve Flow of Funds report, describing the financial health of households, corporations, and the government. 

While net worth is on the upswing, consumers are leaning more on credit card debt and larger mortgages, causing liabilities to grow. Megan examines this trend, along with the shift of households moving funds from traditional banking deposits to money market mutual funds. Despite these trends, Megan suggests that consumers are in relatively good health. However, she also notes the alarming increase in government debt, rising at its fastest pace in three years. 

Hello, this is Megan Horneman, the Chief Investment Officer for Verdence Capital Advisors. We're coming to you today with our regular segment of Markets with Megan and we're going to talk about the release of the Federal Reserve Flow of Funds report that came out last Friday. This is a quarterly report and it gives us a 50,000-foot view from the top to the bottom, on households, corporations, government. How much are they borrowing, how much are they lending, what is their net worth? What does their balance sheet look like? We like to look at the balance sheet of the households to see what is their true health, especially given the rise in interest rates and then the decline we saw last year in the equity markets. And what we saw was that household net worth, which is going to take into consideration everything that a household owns and then subtract out the liabilities to that Household net worth, rose to a record high. We've now recouped all the losses that we're seeing.

During COVID, the biggest increases in that household survey were the fact that financial assets were up about 6% year to date. That's not surprising given the big rally we've had in 2023 in the equity market. The value of real estate another area that helps with that net wealth effect that was up about 5% year to date. What's concerning is liabilities continue to creep higher as well, so the rise in the assets was more than the rise in the liabilities, but it is still creeping higher. We now have liabilities at a record high as consumers continue to rely on credit card debt as well as having to take out higher mortgages.

The one thing in the household side, too, is that money market mutual funds the amount that are held by households that's up about 15% year to date, and the amount of money that's in savings deposits at banks is down about 5% year to date. So consumers continue to move to traditional money markets to try and get some extra yield and they're pulling this from the traditional banking deposit system. We have talked in the past about how that can be concerning and if this continues for the banking system, but for now, we're seeing that consumers look pretty healthy. On the government side, the federal debt rose. That was the fastest pace in three years that we saw in the second quarter, and that was primarily some nuances around when the debt ceiling, when the debt ceiling debate, was resolved, and that's it. That's all we have today. If you have any questions or comments, please feel free to reach out at podcasts at verdencecom. Thank you.