Individuals & Their Debt

One of our arguments for the last year has been to ask "What if things are getting better?" {See here and most recently here.} In that category I'll reference this chart below courtesy of The Reformed Broker.com and via Dave Wilson on Twitter as @theonedave.

Dave points out that:

"Consumers have reduced their debt burdens enough to be able to withstand higher taxes and help sustain the U.S. economy’s expansion, according to Pavilion Global Markets Ltd. strategists.

As the CHART OF THE DAY shows, mortgage and consumer-loan payments amount to the smallest percentage of after-tax income since 1983, according to quarterly statistics compiled by the Federal Reserve.

The debt-service ratio was 10.6 percent of disposable income in last year’s third quarter. Five years earlier, the figure peaked at 14.1 percent. Pavilion highlighted the drop yesterday in a report with a similar chart. Household spending is poised to “strongly contribute to growth” this quarter and next, Pierre Lapointe, head of global strategy and research at the Montreal-based firm, and two of his colleagues wrote. Consumers account for about 70 percent of the economy, according to Commerce Department data."

As consumer balance sheets improve capital is freed up for other uses.  Now frankly I think that some of that money is going to go into savings.  The guy that was 40 in 2000 for example is in his 50s now and probably has to make up some time for retirement savings.  But savings dollars get recycled back into the economy in the form of in investment; think stock market, think real estate.   Money also gets recycled back into the economy by spending.  

A consumer feeling better about their personal finances could take some of the drag off the fiscal impact of the higher medicare taxes that became low in January and the higher social security taxes we are all paying now.  This and lower energy prices could be a positive surprise in the early part of 2013.

Link:  The Reformed Broker: Household Deleveraging, Illustrated.