In recent years, The Hamilton Project has tracked the changing state of household finances. In this piece, we provide data interactives for key economic indicators for consumer spending, income, and wealth by business cycle. We highlight the 2020 business cycle (in orange) relative to the seven most recent business cycles (from 1960 through the Great Recession, in green and purple).
We find that:
- Consumer spending has been solid, primarily driven by robust goods spending.
- Real disposable personal income—an important driver of spending—has been relatively weak, even though real compensation has held up relatively well.
- Household wealth remains a source of strength for spending, although homeowners’ equity is expensive to borrow against, and gains in corporate equity have been volatile.
Select real personal consumption expenditures:
The first interactive chart shows the percent change in real personal consumption expenditures since the business cycle peak, overall and by goods and services since the previous business cycle peak. Eight quarters after the recent business cycle peak, growth in total consumer spending looked quite strong relative to previous business cycles, but it then moderated: 18 quarters in, total spending now stands 12 percent higher than in late 2019. That puts growth on par with the 1990 cycle but below all others at this point in the cycle except in the 2007 cycle. After the Great Recession, it took almost eight years for spending to rise by a similar amount.
In the current cycle, goods spending has grown much more than services spending. The surge in goods spending through 2021 was significant enough that, even with more modest subsequent growth, only in recent quarters does the cumulative growth in goods spending look comparable to any other business cycle we examined. In contrast, the growth in services spending looks quite weak relative to previous business cycles—again with the Great Recession caveat.
Select real income:
The second interactive chart shows the percent change in real disposable personal income and real compensation of employees since the previous business cycle peak. The strength of spending growth in 2021 and subsequent moderation followed a somewhat similar path of real income growth. Real disposable personal income saw very strong gains at the beginning of the current cycle, largely reflecting fiscal support to households. Since early 2022, the growth in real income relative to the previous cycle peak has been at the low end of previous cycles.
This pattern was also evident for real compensation. Growth in wages and salaries exceeded inflation within a few quarters after the pandemic began, and through 2021 compensation growth was strong compared to previous cycles. Since then, real compensation has continued to grow, but more modestly. The cumulative growth of real compensation through this point in the business cycle has been much stronger than in the 2007 cycle. At this point in the 2007 cycle, real compensation was still lower; today, real compensation is 8 percent higher than at the end of 2019. Taking a broader view, a recent analysis shows the pace of compensation in the current cycle has matched the trend in compensation from 2007 to 2019. In comparison to previous business cycles, growth in real disposable personal income has been weaker than growth in compensation. That is because, at this point in the current business cycle, personal taxes are relatively strong, and government benefits are relatively weak.
Select household wealth-to-income ratio:
Interactive figure 3 shows changes in household net worth, liquid assets, corporate equities, and owners’ equity relative to income since previous business cycle peaks. Relative to the moderate pace of income, household wealth has expanded robustly, leading to a large increase in the wealth-to-income ratio and providing significant support for consumer spending. Indeed, the run-up in stock prices and home prices led to an increase in the net worth-to-income ratio in the first two years of the business cycle that was larger than in any cycle since 1960. Although the wealth-to-income ratio has fallen since early 2022, the cumulative increase at this point in the business cycle is still quite large relative to all but the 2001 cycle.
The increase in the homeowners’ equity-to-income ratio peaked at 0.6 in 2022; but even with a deceleration in home prices since then, the increase in the ratio at this point in the current cycle is still significantly higher than in previous cycles. That boost to homeowners’ balance sheets is encouraging greater consumer spending. However, that spending is likely being financed by a reduction in saving out of income rather than borrowing against homeowners’ equity, because the high level of mortgage rates has made cash-out refinancing expensive.
The corporate equities-to-income ratio has increased 0.4 during this cycle, a strong showing four years into a cycle. But, its path has been much more volatile—perhaps dampening how much households feel confident in spending this wealth. Moreover, household wealth is increasingly concentrated in illiquid assets, such as housing and corporate equities, rather than in liquid assets like currency and deposits. As of today, the net increase in the household liquid asset-to-income ratio is nearly zero, notably lower than at this point than in many previous cycles and lower than the gains in illiquid assets. Households no longer have significant resources from pandemic-era fiscal support sitting in liquid accounts and ready to finance consumer spending.
Going forward, the outlook for consumer spending is mixed. Some factors point to weakness. Goods spending might outright fall if some of the increase in goods spending over the last few years, particularly durable goods spending, proves to have been a change in the timing of such purchases rather than an overall in increase in spending over time. In addition, real income growth has been modest relative to previous business cycles.
Other factors point to more strength in spending. Household wealth looks quite strong, and an expected decline in mortgage rates will make it less expensive for homeowners to borrow against home equity. If the recent strength in corporate equities endures, consumers may be more confident in spending out of that wealth, as well.
