After three years of cautious spending and paying down debt, American households have significantly improved their balance sheets. Yet consumer confidence slipped this month as more people worried about the job outlook.
Economists have raised their growth forecasts for the final months of the year and 2011, amid reports of slowing layoffs and more business and consumer spending. Still, home prices are falling, and the unemployment rate increased.
Household balance sheets have significantly improved. In the fall of 2007, 14% of the after-tax income in U.S. households went towards paying mortgages, credit cards and other consumer loans. Add in other financial obligations, such as auto lease payments, rents, homeowners' insurance and property tax payments, and nearly 19% of household income was consumed.
In the third quarter of this year, those numbers fell to just under 12 % and 17%, which translated into a drop in payments of $228 billion a year. That leaves more money to save and invest. Or spend--helping to explain why stores had their best holiday shopping season since 2006.
Before the financial crisis hit, U.S households and businesses were spending more than they were taking in by about 4% of GDP, according to an
Some of the lower debt has to do with reduced home equity lines of credit and tighter standards for other loans. Some potential homebuyers couldn’t get mortgages and many spent less because had lost income or feared losing a job.
However, there may be a long-term shift to frugality. Until 2009, consumers were increasing their non-mortgage debt obligations each year. In 2009 net borrowing other than mortgage was a small negative, down $13 billion. “Since consumers had been borrowing an average of over $200 billion per year between 2000 and 2007, this indeed looks like a change in behavior” wrote the authors of a November
Consumers tightened spending much more drastically in this recession than in others. Consumption declined by 1.7% a year on average and in the first year of the recovery that began in mid-2009, consumption increased only 2%. In the six recessions before this one, spending slowed down to a 0.7% rate instead of falling, and consumption rose by 4.4% in the first year of recovery.
Especially if more jobs open up as a result of moderately increased spending, all this is good news for the U.S. economy.
A cautionary note: The economy-wide figures don’t account for the fact that some Americans are still heavily indebted. As
Temma Ehrenfeld writes for Financial Planning.