In the years before the financial crisis, the American consumer borrowed a lot of money to boost their spending.
They took out mortgages to buy homes, they took out auto loans to buy cars, they took out student loans to go to college, and they charged everything else on their credit cards. And debt servicing, like making monthly payments, became a very high percentage of disposable income.
When the financial crisis hit and people started losing their jobs, these obligations became onerous and scary. And not surprisingly, American households did the prudent thing and cut back on debt or just stopped taking on new obligations.
“This data suggests household cash flow is in much better shape now,” Calculated Risk’s Bill McBride said.
Indeed, Americans did so much cutting that the household debt service ratio — that is periodic debt payments as a percentage of total disposable income — is near a record low of 9.9%.
“Investors are overlooking the significantly improving conditions for consumers in 2015,” Fundstrat Global’s Tom Lee said in a presentation to clients on Tuesday. “US consumer net worth of $US80 trillion is the highest as a % of GDP and $US value in the world.”
Lee presented this chart of debt service ratios during previous US economic growth cycles.
“The debt service ratio is well below the 11.3%-13% seen at this point in past expansions,” Lee said.
In other words, Americans have a lot of flexibility to spend.
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