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Americans are hoarding money in checking accounts

Senior woman paperwork
Dan Tardif | LWA | Getty Images

Cash -- or something close to it -- is king again.

Enjoying a steady job market but reluctant to spend freely due to economic uncertainty, a wide swath of middle-class Americans are hoarding money in banks.

Total bank deposits rose 6.6% last year to $10.7 trillion, extending steady growth seen in recent years, data from the Federal Deposit Insurance Corporation show.

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Deposits measured as a percentage of bank assets are 77.6% in the first quarter of 2017, the highest since 2006, according to data economic research firm Moebs Services.

And Americans love liquidity. They hold about $2 trillion in checking accounts now, says Mike Moebs, CEO of Moebs Services, which provides research and consultancy services to financial institutions. The average U.S. checking account deposit is about $3,600, climbing from $1,000 in 2007, he says.

Much of deposit growth surely has to do with the resilient U.S. economy that continues to expand from the depths of the financial crisis. Steady paychecks are the industry's best friend.

"Incomes are up and people are choosing to deposit (their money) rather than increase spending," says Paul Merski, group executive vice president of congressional relations and strategy for the Independent Community Bankers of America.

A dearth of investment options is also driving the hoarding behavior. Only about half of Americans are invested in the stock market, according to Gallup. And other common options, such as certificates of deposits and savings accounts, are offering interest rates that are barely above those of checking accounts.

While saving is deemed a personal finance virtue, would-be shoppers holding tightly onto their budgets can also be a drag on the economy. U.S. consumer spending was relatively flat, up only 0.1% in May, the latest data from the Commerce Department show. Retail and auto sales have also been sluggish.

Consumers "are not spending," Moebs said. "The Great Recession isn't over for consumers and small businesses. Small businesses feel a great deal of uncertainty and they're being very cautious, especially with any capital plans they have. "

High debt obligations also are affecting household spending decisions. Total household debt balances rose by 1.2% in the first quarter from the previous quarter to $12.73 trillion, according to the Federal Reserve Bank of New York. That's 11th consecutive quarter of growth and surpasses the peak of $12.68 trillion seen in the third quarter of 2008.

Bountiful customer deposits also likely helped boost large banks' incomes, and the rising numbers will be reflected in a slew of bank earnings reports due in the next few days.

Banks also stand to benefit from "a reasonable rise" in interest rates, Merski said. Federal Reserve Chair Janet Yellen told Congress Wednesday that the central bank plans to keep raising its key short-term rate. As interest rates rise, the "spread" in the rates between what they earn in loans issued and the interest paid to deposit customers also increases. "If banks can make more spread, they may also make more loans," he said.