Consumer credit card debt plunged last year as part of the fastest four-quarter drop on record. Here, a credit-card transaction at an ice-cream shop in New Orleans on a recent day.
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The U.S. economy shrank, and Americans got richer.
Gross domestic product fell by 2.4% between the end of 2019 and the end of 2020, with roughly 10 million fewer people in jobs at the end of last year than before the pandemic. Yet the average American household was in a much better financial situation thanks to rising asset prices and massive disbursements of government aid. Data from the Federal Reserve shows that U.S. households accumulated $12 trillion in new wealth over the course of 2020.
About half of the total increase in net worth came from rising stock prices, which boosted household wealth by about $6 trillion between the end of 2019 and the end of 2020. An additional $3 trillion took the form of higher household bank deposits, money-market fund shares, cash accounts at brokerages, and other liquid assets. Rising house prices added $2.1 trillion in wealth, which more than offset the $450 billion increase in mortgage debt. Americans also added about $430 billion to their holdings of consumer durables such as cars, appliances, and exercise equipment. The rising value of defined benefit pension entitlements accounted for most of the rest.
The distribution of these gains wasn’t even, however. About a third of the total increase in net worth went to Americans in the top 1% of the income distribution—about the same as went to the bottom 60% of Americans. Moreover, there were significant differences in the assets that contributed to gains in net worth.
While the highest-income Americans mostly increased their holdings of liquid assets such as bank deposits and stocks, the wealth gains of those lower down the spectrum mostly took the form of rising home equity, bigger pension promises, and a growing stock of consumer durables.
Americans in the top 20% of the income distribution boosted their holdings of bank deposits, money fund shares, and other forms of saving that can easily be converted to spending by more than $2 trillion, while the bottom 80% added only $900 billion. By contrast, both the top 20% and the bottom 80% each added about $900 billion in home equity over the course of 2020.
While most of the change in net worth can be explained by the asset side of the equation, there were also some notable changes in U.S. household liabilities in 2020.
For one thing, mortgage debt rose at the fastest rate since 2008 as homeowners took advantage of rising house prices and falling rates to extract hundreds of billions of dollars of home equity. Total residential mortgage debt hit a new all-time high in 2020 of $10.9 trillion, surpassing the previous peak of $10.7 trillion at the beginning of 2008. The good news is that the owner-occupied housing stock is worth about $10 trillion more now than then, while incomes are also much higher.
Partly offsetting the surge in mortgage debt was the sharp decline in credit card and other revolving consumer loan balances. Since the start of 2020, revolving credit balances fell more than $100 billion, or 11%. That was the fastest four-quarter drop on record, beating out the 10% decline from 2008 to 2009. By the end of the year, rising student and auto loan balances offset the drop in credit card debt, but those debts carry lower interest rates and therefore represent lighter burdens for borrowers.
The Fed doesn’t provide detailed breakdowns on who owes the various types of consumer credit, but it seems likely that both the big drop in credit card balances and the subsequent rise in student and auto loan balances were led by middle-income and lower-income Americans.
That said, the group that seems to have had the most success lowering its debt burden were Americans in the top 1% of the income distribution. Their consumer credit balances fell more than 4% over the course of 2020, whereas everyone else was essentially flat.
The disbursal of the $600 and $1,400 checks in January and March—and the stock market’s middling performance over the past few months—have likely led to some big changes in the household net worth distribution in the start of 2021. But that picture won’t come out until the summer.
Write to Matthew C. Klein at matthew.klein@barrons.com
