Monday, September 27, 2010

Household financial obligations have eased considerably

According to a recent release by the Fed, households' financial burdens continued to decline in the second quarter of this year. From their peak in Q3/07, total household financial obligations as a % of disposable income have declined by fully 10%. And as this chart shows, debt and financial burdens today are about where they have been for the past 25 years on average.

Pessimists will argue that bankruptcy and foreclosure have been the drivers of reduced financial burdens, but while that may be true for a portion of the population, I think it is also the case that many people have been working hard to pay down debt in the past several years, while at the same time disposable personal income has been rising. In that regard, I note that disposable income (the denominator of the ratios in the chart) has increased on average about 3% per year per capita, and 4% per year in nominal terms, over the past 5 years. Thus, it's likely that most folks have seen their disposable income rise by more than their debt and financial obligations in recent years.

It's hard to see how this chart could be construed in a negative way. At the very least, we can say that consumers today are no more at risk from too much debt than they have been for the past several decades.


Family Man said...

And adjusted personal income (ex transfers) is picking up slightly since Q4 09.
Surprisingly, it happens half a year post recession, while in 2001-2003 it took a year.(API increased for the first time in the beginning of 2003, while recessions has ended in 2001)

Public Library said...

Ahh and away we go. DOW 38,000 is now officially documented. While not entirely egregious, we have seen this movie clip before.

Scott Grannis said...

A DOW at 38,000 in 15 years is not a very outrageous prediction. That assumes 8.8% annualized growth, only slightly higher than what we have seen over the past 50 years.

marmico said...

The burden ratios declined from 2007Q4 to 2010Q2 primarily due to 2 factors:

1. Current personal transfer payments increased by $534 billion.

2. Current personal taxes decreased by $382 billion.

See BEA Table 2.1, lines 16,25

So the denominator was juiced by an unprecedented government tinkering of $916 billion or 8% of disposable personal income. Ceteris paribus, the household financial burdens have barely budged.

This WSJ blog suggests that nearly the entire decline in household credit was due to defaults.

Public Library said...


I have seen similar reports. If there has been one lesson learned over the past 2 years, it is not that debt is a bad thing, only small debts.

The markets moral hazard is now leveraged 1000 to 1.

Bill said...

marmico: What about the fact that new loans have not been made in the first place (at least not at the previous pace) and household income has increased? In your view, what role do these factors play in easing household financial obligations?

marmico said...

What about the fact that new loans have not been made in the first place (at least not at the previous pace) and household income has increased?

New loans are made and old loans are retired every day. The issue is the aggregate growth rate. There is none. Of the government tinkering, as a rough approximation in aggregate 2/3 went to savings and 1/3 to consumption.

The financial obligation ratio is being reduced involuntarily via default and voluntarily via no net credit growth (well per capita credit growth is actually declining) and mortgage refis at lower interest rates.

A question for you. Of the 7.5 million squatters (those household occupants who are not paying their mortgages even though the Fed pretends that they are for statistical purposes), what percentage of the monthly foregone payment (probably about $7 billion per month) is going to consumption or savings?

Maybe Grannis can look it up. Are the foregone monthly payments of household squatters included in the numerator of the financial obligations ratio?