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Households' financial burdens continue to ease




Today the Fed released data for Q1/11 that show that households' financial burdens continued to ease. Total financial obligations (auto leases, homeowners' insurance, property tax, mortgage and consumer debt), as a percent of disposable income, have fallen 13% from their Sep. '07 high. As the chart above shows, debt and financial burdens have on balance been unchanged since 1985, after a rise in the mid-2000s.

The upshot of all this is that there has been some meaningful deleveraging going on in recent years. As I have pointed out before, this deleveraging occurred during a time of economic recovery—debt is not essential for a recovery, and reducing debt is not necessarily contractionary. Debt can facilitate economic activity, but it is not necessary for growth. The problem with debt comes when consumers and/or businesses increase their borrowing in the belief that their financial health will be unchanged or improved in the future, only to find out that the future did not turn out as expected. This is not a fatal problem, but it does throw a wrench into the economy's gears that can take some time to work out.

The ongoing reduction in financial burdens is a healthy sign that reflects the fact that people and businesses have been actively adjusting to changing circumstances, and it is this dynamic response to adversity that sets the stage for a new cycle of growth. I would note in that regard that the last time we saw significant household deleveraging was in the 1990-95 period; over the subsequent five years, the economy grew by more than 4% a year.

UPDATE: To answer several readers' concerns, I believe the data for this chart include student loans, since they are included in the Fed's Consumer Credit release.

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