Deleveraging by American Consumers Continues

Consumers in the U.S. started fixing their finances last year. This process has gained momentum in the last quarter and this week we learned that the savings rate reached a high of 6.9%. Americans have been reducing their debt and spending less during the past few quarters.


Household liabilities fell to 131.1 % of disposable income (after-tax income) in the last quarter from a peak of 141.0% in 2007.At the end of 2008, the number stood at 133.9%. In the first quarter consumers paid down debt and did not add new debt to their finances. From the above chart, we can see that liabilities grew form about 87% of after-tax income in 1990 to an all-time high in 2007 due to the availability of cheap credit and excessive borrowing. In this decade household debt-to-income ratio rose considerably faster than previous years.For the first time ever, households debt fell for two quarters in a row for 4Q, 2008 and 1Q,2009.

Since the U.S. economy is a consumer-based economy the fall in debt growth has a negative impact on a any recovery.

A historical chart of the household liabilities is shown below.


Source: BEA,  Flow of Funds of the United States, Federal Reserve

From the late 80s households continued to accumulate more liabilities up until last year. In Q1,2007  total household liabilities decreased by $255b compared to taking on about $2.8T debt in Q1,2008. Just like the borrowing binge went on for many years, the deleveraging process will continue for a few years.

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