The Great Deleveraging

Chart from J.P. Morgan's 4th Quarter Guide to the Markets.  Chart shows how households have lowered their debt balances since the recession began back in 2007.  "The chart on the left shows the makeup of the household 'balance sheet' and the top-right chart shows what percentage of disposable income is spent on debt service, highlighting the consumer deleveraging we have observed over the past few years.  The chart on the bottom looks at household net worth, which is the sum of all assets, including home equity, less all liabilities."

Consumers paring down their debt has been a substantial headwind on markets.  That may be starting to change.  The New York Federal Reserve noted last week that the deleveraging process has begun to decelerate and household debt balances have started to increase.  Now in one sense that could be a cause for alarm if we were seeing consumers resort to their wild spending ways that seemed to prevail from 2004-2007.  That does not seem to be the case.  The Fed in that report notes, " Delinquency rates overall have been steadily improved since the crisis.  Overall 90+ day delinquency rates are at 5.3%, much improved from the peak of 8.7% reached during 2010:Q1.  New foreclosures have finally reach pre-crisis levels and are now at the lowest levels since 2005…." 

I think on balance we put this in the "Things Are Getting Better" category.  I think it points to how the straw of low interest rates and a better economic environment is finally starting to stir the consumer spending drink.  This could have very positive implications for economic growth next year if it's true and continues to pan out.