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Household debt is back near the long-term trend line [ClearOnMoney]
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Household debt is back near the long-term trend line

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Commentary

Household debt is back near the long-term trend line

10 Jun 2011 by Jim Fickett.

Household debt as a percentage of disposable income peaked at 130% in Q3 of 2007, and has now dropped to 115%. This is back to about the level of 2004, undoing a good part of the unhealthy rise in the boom years. For now, at least, it appears that the household sector is restoring some much-needed resilience.

The quarterly Flow of Funds report from the Federal Reserve is the only serious, public, regularly updated source for household balance sheet information. Data for Q1 was released yesterday. It is worth keeping an eye on total household debt, as one indication of how the household sector will fare in the next crisis. The graph below shows total credit market liabilities (essentially all debt), mortgage debt, and consumer credit (consisting mainly of credit card debt, auto loans, and student loans). Mortgage debt and consumer credit together constitute most of household debt.

All debt levels are seasonally adjusted and normalized by disposable personal income (from NIPA Table 2.1, which is also seasonally adjusted). For each of the three curves, I've connected the first and last points with a dashed line, to show that current debt levels are not too far from the long-term trend.

A high debt level may be fine before the ARM resets, or quite bearable while you have a job, and then impossible when interest rates rise or the job goes away. So debt level alone only gives a very general indication of resilience to shock. Still, it is encouraging that the overall debt level has come down considerably since the crisis, and has undone a good part of the extraordinary rise during the preceding boom.

While debt levels are also related to spending, it is quite difficult currently to make any connection, because much of the drop in debt is not due to paying the debt off, but rather to foreclosures. Since the average foreclosed home is delinquent by over a year, the erasure of the debt may have little effect on spending.