Good News for the Economy: Less Debt, More Spending
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The Fiscal Times
December 28, 2010

After three years of cautious spending and paying down debt, American households are in far better financial shape and spending is once more on the rise. This year’s holiday shopping season has been the best for merchants since 2006, probably strong enough to push economic growth to a healthy 4 percent annual rate in the final three months of the year.

After the bursting of the housing and financial bubbles left them with the highest debt burdens in modern history, consumers haven’t had to take on new debt to finance their current spending. Incomes have been going up fast enough that the personal savings rate, which fell close to zero at times during the boom, has stayed well above 5 percent in recent months. Over the 12 months ended in November, both personal consumption spending and personal incomes were up 3.8 percent, the Commerce Department reported last week.

It's not just households that have benefited. As debt burdens have eased, borrowers are keeping more current in their payments, helping financial institutions recover from the downturn. "Delinquency and charge off rates have been more encouraging, with rates falling for measures of credit card and real estate debt," said Young Kim, an analyst at Stone & McCarthy Research Associates. "The implications are good news for the economy."

The improvement in household balance sheets is apparent in new quarterly data from the Federal Reserve: The household debt-service ratio, which tracks the cost of required payments on outstanding mortgage and consumer debt as a share of disposable personal income--which essentially is after-tax income, and the financial obligations ratio, or FOR, which adds auto lease payments, rents, homeowners' insurance and property tax payments.

 

The debt-service ratio peaked just shy of 14 percent in the fall of 2007. That is, 14 percent of after-tax incomes were going to pay mortgages, credit cards and other consumer loans. Similarly, nearly 19 percent was going to meet those plus the other financial obligations.

covered the Federal Reserve and the economy for 25 years at the Washington Post before joining Bloomberg News in 2004. In 2009 he began writing freelance pieces for, among others, Thomson Reuters, and is widely recognized for his ability to interpret the Fed.