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 Q1,2007Â 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.
