Consumer Debt Burden Less-Crushing Than It Was A Year Ago

Some good news on the consumer-spending front:

American consumers have begun to work off the mountain of debt they have accumulated over the past two decades (small progress, but a start).  Also, rock-bottom interest rates have reduced the burden of carrying this debt. 

Taken together, these two factors free up money for saving and spending, both of which will eventually help put the economy back on solid footing again.

First, from Ned Davis Research, a picture of overall consumer credit as a per cent of GDP, which is finally dropping.  A heck of a long way to go, of course.


Next, a look at two household debt burden ratios, as analysed by Asha Bangalore of Northern Trust.  These are showing modest improvements:

Consumers are strapped in a tight financial spot — this observation has appeared in many macroeconomic commentaries for several months.  There is good news from the Fed regarding this matter.  The Fed’s estimate of financial obligations of households for the third quarter shows a decline in the financial burden, stemming from lower interest rates and a reduction of consumer debt.  During the first quarter of 2008, the household financial obligation ratio stood at 18.86% of disposable income, which fell to 17.76% in the third quarter of 2009.

Household Financial Obligation Ratio

Next, the debt-service ratio for consumer debt among homeowners, again from Asha Bangalore.

The financial obligation ratio of homeowners with respect to consumer debt and auto leases has fallen sharply to 5.7% of disposable income from 6.28% in the first quarter of 2008 (see chart 3).  The reduction in financial obligations of households is a positive development because it encourages saving.  Eventually, the saving shortfall of the U.S. economy has to be eliminated to ensure long-term prosperity of the nation.

Consumer Financial Obligation Ratio

Of course, it’s worth noting what will happen to these debt-service ratios if interest rates ever spike again (they’ll go up).

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