The latest recession sparked by the COVID-19 pandemic, though, was different. It led to an unprecedented spike in layoffs, but the finances of consumers actually improved as they spent less and—thanks in part to government stimulus relief—saved more.

“Another differentiator this time around is how broad the consumer recovery has been,” said Vanguard Principal and Co-Head of Structured Products Bob Behal. “Our research shows that consumer credit profiles have improved in all income brackets, and the magnitude has been fairly large.

While the personal savings rate in the U.S. as a percentage of disposable income has been well below 10% over the past two decades, it recently climbed to multiyear highs. Peaks in 2020 and 2021 roughly coincided with payments of government stimulus checks.

Over the same period, the financial obligation ratio, a broad-based measure of the ratio of household debt payments to total disposable income, declined from levels above 16% throughout the 2000s to a current 20-year low of about 13%.

Another metric we track to gauge the health of the consumer is the rate at which credit card companies write off bad debt. Figure 1 shows that while the unemployment rate climbed to more than 14% during the pandemic as large swaths of the economy were shuttered, credit card write- offs trended lower.

One way we have attempted to quantify the breadth of the positive trajectory of consumer finances is by evaluating cash balances stratified by income. To do that, we used a measure tracked by the Federal Reserve, which is the sum of checkable deposits and currency, time deposits and short-term investments, and money market fund shares. This data series is a good proxy for the change in consumer savings, although it does not capture data for people outside the banking system.

Figure 2 shows that the change in cash equivalents has been increasing even during the pandemic for all three income cohorts. That stands in sharp contrast to the previous recession in 2007‒2009, when we saw the more typical pattern—savings increased among higher-income earners but decreased among lower-income earners. The nature of the latest crisis, government stimulus payments and supplementary unemployment benefits, and the stability of other assets such as real estate and financial assets appear to have left the consumer in better financial shape than expected at this point in the cycle.

Consumers have accumulated “excess” savings of around $2.6 trillion—savings on top of what they would typically have had on hand. If they open their wallets and spend more, they could fuel faster economic growth.

The fact that credit profiles have improved across income levels matters, too. “While it’s good to see those of higher-income cohorts improving,” said Mr. Behal, “the fact that lower-income cohorts are on the same trajectory is more unusual and could support a broader and longer-lasting economic upswing.” And even if consumers remain cautious, they should be able to provide some cushion for the economy when activity inevitably slows.