Household Debt Service Ratio Hits New Record High
The retail sales data for June and for the second quarter as a whole indicate that the U.S. consumer spending binge is winding down. One factor that may finally be curbing additional consumer spending is the rising household debt-service burden - i.e., required principal and interest payments as a percent of disposable (after-tax) income. The chart below shows that the household debt-service burden hit a new record high of 13.93% in Q1:2006. We suppose it is no wonder that the debt-service burden is on the rise given the behavior of the other variable plotted in the chart - household credit market borrowing as a percent of disposable personal income. This ratio has been trending higher since 2000, the beginning of the housing boom. Low financing rates mitigated the debt-service burden for a while even as household borrowing exploded. But with the Fed having raised the funds rate by 425 basis points in a 25-month span - the largest 25-month funds rate increase since the Volcker era - the combination of rapid borrowing and rising financing rates is pushing up the debt-service burden at a faster rate. With employment growth slowing, which will retard growth in disposable personal income, and a massive amount of mortgage debt subject to interest rate resets this year and next, the household debt-service ratio is destined to reach even higher levels as we go forward. In turn, this will be a significant headwind to consumer spending. But don't worry. I'm sure corporations will be stepping up their capital spending as their customers are slashing their spending. At least, that's the conventional wisdom.
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Author: Paul Kasriel
Paul L. Kasriel
Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
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Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul's 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst. Through written commentaries containing his straightforward and often nonconsensus analysis of economic and financial market issues, Paul has developed a loyal following in the financial community. The Northern's economic website was listed as one of the top ten most interesting by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets.
Paul began his career as a research economist at the Federal Reserve Bank of Chicago. He has taught courses in finance at the DePaul University Kellstadt Graduate School of Business and at the Northwestern University Kellogg Graduate School of Management. Paul serves on the Economic Advisory Committee of the American Bankers Association.
The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The information herein is based on sources which The Northern Trust Company believes to be reliable, but we cannot warrant its accuracy or completeness. Such information is subject to change and is not intended to influence your investment decisions.
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