Household Financial Stability at the St. Louis Fed

“Our overall economic stability relies ultimately on the collective financial health of all American households." Federal Reserve Board Governor Sarah Bloom Raskin, June 2011

Household Financial Stability is a new research initiative of the Federal Reserve Bank of St. Louis focused on rebuilding the household balance sheets of struggling American families. Research will initially pursue three main questions:

1. What is the state of the American balance sheet? What can we say quantitatively about the overall health of the household balance sheet?
2. Why does it matter? What are the economic and social outcomes, at both the household and macro levels, associated with varying levels of savings, assets and net worth?
3. What can we do to improve household balance sheets? What are the implications for future research, public policy, community practice, financial institutions and households? 

While the status of American household balance sheets has improved somewhat in the last couple of years, the financial health of American households remains weak. Close to half of all households surveyed in the 2009 Survey of Consumer Finances had less than $3,000 in liquid savings. In addition, close to half of all Americans consider themselves financially fragile, reporting that they are “certainly” or “probably” unable to come up with $2,000 from any source in 30 days, according to social scientists Annamaria Lusardi, Peter Tufano and Daniel Schneider in their 2011 paper, "Financially Fragile Households: Evidence and Implications."

Why is it important to drill down into the health of household balance sheets? Looking back over the last few years, we have seen the damage to families, communities and the broader economy when we, as a nation, were not sufficiently attuned to four key balance sheet factors affecting American households. Too many Americans relied too heavily on wealth-depleting financial services, maintained a low level of savings, carried risky and high-cost consumer and mortgage debt, and did not diversify assets beyond housing. There is also evidence that weak balance sheets contributed to the financial crisis and economic downturn of the last few years. In their paper, "Household Balance Sheets, Consumption, and the Economic Slump," economists Atif Mian, Kamalesh Rao and Amir Sufi showed that 65 percent of the 6.2 million jobs lost between March 2007 and March 2009 were due to household “deleveraging”—families needing to reduce their debts and rebuild their savings.

A basic premise of the initiative is that families improve their financial stability through broad-based economic growth, higher net household incomes and, especially, stronger balance sheets. Financially stable families face less economic risk and more economic mobility within and across generations. Also, financially healthy families spend, save and invest more, and thus contribute to economic growth.

The initiative will undertake a range of research and outreach activities, including conducting and publishing research on key balance sheet issues; organizing research conferences and symposia; establishing a web-based research clearinghouse; developing a “Household Balance Sheet Index”; and organizing forums to better understand the balance sheet issues affecting struggling families and communities.