Tuesday, March 19, 2013

Households' finances continue to improve

According to the Fed's calculations as of the end of last year, U.S. households' financial burdens fell to  the lowest level they have been in over 30 years. This comes thanks to rising incomes, belt-tightening, debt refinancing, deleveraging, and debt restructuring.  


Note that the lines on the chart are the ratio of total monthly financial obligations (blue) and mortgage and consumer debt payments (red) to disposable income. The typical household now spends only 15.5% of its disposable (i.e., after-tax) income on auto leases, homeowners' insurance, property tax, mortgage payments, consumer debt payments, and rent. This is down from a high of 19% in the third quarter of 2007: that's a reduction of almost 20% in recurring monthly payment obligations relative to disposable income.

This is not only very impressive, but also very encouraging for the future, since it means that households' financial health is back on a much stronger footing, despite the fact that total employment is still far below where it was prior to the recession.

It never pays to underestimate the ability of the U.S. economy—and U.S. households—to cope with adversity and adapt to changing conditions. If only our government could do the same ...

6 comments:

Gloeschi said...

If the US government also joined your deleveraging party you probably wouldn't be able to get a single dollar out of the ATM around the corner.
A sovereign without taxable individuals does not exist. Government debt is simply a future household liability (via higher taxes). So wouldn't it be more appropriate to show household and government debt combined?

Junkyard_hawg1985 said...

Does the total financial obligations include student loan debt? This is one area where Americans have not been deleveraging.

Scott Grannis said...

Re Student Loans: The Fed considers student loans to be part of "Consumer Credit," and "Consumer Debt" is included in the calculation of financial burdens, so perhaps the answer is yes, but I can't be sure.

Student Loans are the only part of Consumer Credit that is expanding, and they are expanding by a lot.

Pragmatic Investor said...

There is no way to tell whether and by how much consumers have reduced their balance sheets from your chart. Your chart simply shows that consumers are not having liquidity issues and can make their payments on time. But it does not answer the question of whether they have indeed de-levered. Their payments have come down because interest rates are at record lows. If interest rates shot up by 2%, your chart would look a lot different.

If you want to make the point that consumers have de-levered a lot, show their debt amount, not financial payments.

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Elizabeth J. Neal said...

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