Monday, March 27, 2017

Household finances are on solid ground

U.S. households' financial burdens (payments for mortgage and consumer debt, auto leases, rents, homeowner's insurance, and property tax, all as a percent of disposable income, are at historically low levels and have not budged for over five years. Moreover, the overall leverage (total liabilities as a percent of total assets) of the household sector is at 30-year lows. Coupled with the fact that weekly claims for unemployment are at historically low levels, this paints a picture of a household sector that is on financially solid ground, more so than at any time in decades.


Today the Fed released data for the fourth quarter of 2016 covering various measures of household's financial burdens. As the chart above shows, financial burdens have been historically low for over 5 years, and are substantially less now than they were prior to the past 3 recessions. I note that consumer debt includes student loans, which now total over $1 trillion and which continue to grow at a significant pace—the only area of consumer finance that is deteriorating, thanks to our beneficent government which is willing to grant student loans with little or no regard for a student's ability to pay.


Households' leverage has plunged by about one-third since the 2008 recession, as the chart above shows, and leverage is now back to levels last seen some three decades ago.


Initial claims for unemployment, shown in the chart above, haven't been so low for a very long time. Workers at social security offices around the country must have a lot of time on their hands these days!


The chart above compares unemployment claims to total payrolls. Here we see that the chances of a worker getting laid off are as low as they have ever been, and by a substantial margin. In recent weeks, only about 0.15% of the U.S. workforce has been handed a pink slip.

Household finances appear to be about as solid as they have ever been, and job security is also about as good as it has ever been. This is not to say we don't have problems, but these statistics are reassuring nonetheless, and not widely recognized.

2 comments:

  1. "Workers at social security offices around the country must have a lot of time on their hands these days!" (8^))

    However, there are lots of people retiring, having issues with Medicare,...so they remain busy one way or the other.

    Not only are fewer people becoming unemployed, but the number of people with jobs keeps climbing.

    Money not spent on credit card interest, etc. is money available to buy goods and services. One might wonder what happens to leveraging when interest rates increase, as now seems plausible.

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  2. George, re credit card debt. Some interesting facts: as of Dec. '16, total credit card debt outstanding was $780 billion, or 5.5% of total disposable income. At its zenith, credit card debt in 2008 reached $870 billion, which was almost 8% of disposable income. Since 2003, when this data was first collected, credit card debt as a percent of disposable income today is only modestly above its lowest point ever, which was 5.2% two years ago. This follows the same pattern of deleveraging that I highlighted in this post. Consumers are much more careful with credit card debt these days.

    As for credit card interest, don't forget that what one man pays another man collects. In many important ways, debt is a zero-sum game; when interest rates rise, debtors pay more but creditors receive more; so higher interest rates don't necessarily detract from total spending. In fact, interest rates typical rise the most when the economy is the strongest. When the economy subsequently weakens, debtors default and creditors take a hit—but again one benefits while the other loses.

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