Were American’s Balance Sheets Protected Against COVID?

The Olympics are every four years. Congressional Elections, every two. Halley’s Comet even flies by on a rough schedule: every 75 years. But, few things — aside from me actually making a funny joke in class — happen triennially, or every three years. However, if you are an economist, one exciting thing does happen on a three-year schedule: the release of The Survey of Consumer Finances (SCF). This survey, released by the Federal Reserve, offers some of the best insight available into Americans’ net worth. What assets and debts do they have on the ledger?

In October 2023, the Fed released the most recent version of the SCF. The survey reflects household wealth as of 2022 (the data come out a year after collected). Since the prior SCF reflected 2019, the new release offers a chance to see how households fared from before to after the COVID Recession. Did households get dragged down by the shock to the economy. Or, did aggressive policies inoculate against the effects?

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Americans’ Net Worth 2019 – 2022

Pretend you hadn’t lived through the period from 2019 – 2022 (can I?!). Say, in 2019, you found a time machine and decided that you would skip ahead a few years. Arriving in 2023, you run straight to your browser and go to the SCF interactive chartbook. You look at the 2022 data and compare it to 2019. Breathless you conclude the only thing that you can: nothing happened. The world must have been quite uneventful in the years you skipped. After all, Figure 1 shows orderly growth in net worth across the middle of the income distribution.

Figure 1. Median Net Worth in 2019 and 2022 by Percentile of Household Income, 2022 Dollars

Across all of the income groups shown, net worth grew between 2019 and 2022 at a rate of between 13 and 43 percent. Indeed, the growth rates of all but the lowest income group were actually higher between 2019 and 2022 than they were from 2016 to 2019. So, household balance sheets didn’t just survive COVID, they seemed to have thrived. Why?

Well, it would seem both sides of the household ledger performed well. Assets went up and debts went down. On the asset side, the most commonly held assets by the typical American household are retirement savings and a primary residence. And, these assets performed well over this time period, with both retirement savings and the value of primary residences increasing in value by 20 percent for the median household.

On the debt side, two major sources of debt for consumers — installment debt (e.g., car loans) and credit card payments — shrank by two and ten percent respectively over this period. None of this is surprising. According to the SCF, those pandemic aid payments — $814 Billion over the three rounds — caused the typical American’s checking account to swell by 48 percent. This infusion left households with more cash, and apparently many used it buy assets and pay down debt.

So, the COVID Recession’s impact on households’ long-run financial health appears minimal. Other recessions haven’t been so kind.

A Different Effect: The Great Recession

If we look at the Great Recession, we can see that a speedy recovery for Americans’ net worth is hardly a guarantee. Figure 2 recreates Figure 1, except looking at 2007 and 2013. One can see a sizable decline in net worth, even though 2013 is several years after the official end of the recession. In fact, if you compare Figure 2 to the graph above, you would notice by 2019 things still hadn’t recovered.

Figure 2. Median Net Worth in 2007 and 2013 by Percentile of Household Income, 2022 Dollars

The recovery following the COVID-19 recession was somewhat unprecedented in size and speed. Which gets me to an important point.

Trade-offs Are Hard

Many differences exist between the Great Recession and The COVID Recession. I just showed you one of them — net worth recovered much more rapidly from the COVID recession. But, another difference has to do with inflation. The recovery from the Great Recession wasn’t accompanied by nearly the amount of inflation as the recovery from the COVID Recession. And, these two things are almost certainly connected.

As the U.S. came out of the Great Recession, some economists were saying that the Obama Administration’s stimulus program was not nearly big enough. The result, they would argue, was a labor market that would return to normal far more slowly than necessary. Indeed, the unemployment rate on the eve of the Great Recession, in November 2007, was 4.7 percent. It wasn’t 4.7 percent again until January 2016 — a full eight years later. With COVID, the rate was 3.5 percent in January 2020 and had returned to that level in two and a half years, by July 2022. The COVID recovery was six years faster.

And that’s the tradeoff. You can take a steady approach, without huge infusions of cash. The risk: slow return to normal. The reward: low inflation. Or, you can pile money into the economy and hope for a speedy recovery. The U.S. spent nearly triple the amount on the COVID recovery as it did during the Great Recession. The risk: inflation. The reward: speedy recovery and household balance sheets that returned to normal quickly.

Today, when people complain about inflation, I hear them. Although inflation is definitely returning to normal, the resulting higher prices suck. But, I also remind them: the alternative to inflation isn’t no inflation. It’s no inflation with fewer jobs and lower net worth for many Americans.