Thursday, September 24, 2009

Household financial burdens ease

This chart includes recently-released data through June '09. As the dotted green lines suggest, households' debt service and total financial burdens (i.e., payments as a percent of disposable income) have not increased at all since the end of the 2001 recession, and they have even eased a bit over the last year. This is not to say, of course, that many households haven't been ruined by excessive debt obligations (bankruptcy rates are unusually high), because indeed they have. But it does suggest that, in aggregate and on balance, household financial conditions are not at all precarious, and have not changed meaningfully for quite some time.


alstry said...


What do you think about the impact of rising health costs, property taxes, and fuel costs since 2001?

Further, with U6/independent contractor unemployment rate approaching you think we might run into issues when adjustable rate mortgages recast in the next few years?

But overall, it seems like things are doing great on the margin.

Scott Grannis said...

See my post on oil factoids--households are spending the same portion of their disposable income on oil today as in 2001. Healthcare costs are obviously rising. Property taxes on the margin must be coming down, however, given the decline in property prices in most areas.

Public Library said...


I just cannot wrap my head around this chart. How can the majority of Americans purchase homes and cash in on their equity during a time of stagnating income, not have higher debt burdens?

In addition, does this data in any way reflect the burden of people only paying the minimum to service their debt?

Saying the burden is 15-20% means nothing if you discover they will be paying that in perpetuity because the loans will never be paid down...

CFP, EA said...


Thanks for the chart and for bringing attention to debt payments as a percentage of disposable income. Very interesting.

How do you respond to those who focus on debt levels - consumer, financial, government or all combined - to income/GDP. Those percentages have risen dramatically over the past 20+ years. I believe Total Debt is around 3.75 times GDP.

In particular, these people respond to your chart by saying, "Alright, debt payments are in line with the past, but what happens when interest rates increase? Those debt payments will explode."

Also, those on the other side argue that to mitigate the dramatic decrease in household assets - even with the recent rally, stock prices are still down 1/3 and housing prices are down 20-25% - households will look to decrease their debt loads, a process that will take many years and thus will slow the economy for many years.

Not saying that I agree with their arguments, but I liked to hear your responses to them.

Thanks again for the website.

Scott Grannis said...

Public: I'm not sure your assumptions are correct. I doubt that a majority of households refinanced and took equity out. About half of all households own their home outright. As I tried to point out, these numbers are aggregate numbers: a portion of the population is in trouble, but the majority of people are not.

Scott Grannis said...

CFP: Debt to income and debt to GDP ratios have indeed risen, and are probably at all time highs. But that is a misleading statistic. The interest rate on the debt and the repayment period are not insignificant factors, and they are left out of these numbers. The appropriate measure of debt burdens is the monthly payment relative to the person's ability to pay (disposable income).

Also, you need to consider how much debt is floating rate, and how much is fixed. I don't know if the actual numbers are available, but my analysis suggests that households have much more fixed rate debt than floating. Households also have much more floating rate assets than floating rate debt. Thus, households are net beneficiaries of higher interest rates.

If households continue to reduce debt, as they have been doing for most of the past year, this is not necessarily a reason for the economy to slow or be weak. Debt does not drive growth, but it can facilitate growth. The more important thing is how much people are working, earning, and investing.

If I borrow money to finance my spending, that does not equate to an increase in total demand, because the person who lent me the money has that much less to spend.

I don't know why so many people (especially the press) remain confused on this issue. Paying down debt does not cause demand to shrink or the economy to shrink. The money I use to pay down debt goes from my pocket to someone else's pocket. Eventually the money must be spent by someone.