Household Debt Payments Lowest in 30 Years

Wednesday, 26 Dec 2012 09:24 AM

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U.S. households have been saving more and spending less since the financial crisis over four years ago, and family finances are starting to reflect the new trend.

U.S. households spent 10.6 percent of their after-tax income on debt payments in the third quarter of this year, the lowest level since 1983, according to Federal Reserve data cited by The Wall Street Journal.

Tack in other payments not classified as debt, such as rent and car leases, and the figure comes to 15.7 percent, also a roughly 30-year low.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

After borrowing and spending heavily for decades, households are now paying those debts off, while foreclosures and bankruptcies have cut into debt burdens as well.

Tight lending conditions at the country’s banks have helped push the figure down, as have low borrowing costs that have made mortgage refinancing possible.

Falling debt payments will allow households to spend more, which will spur more recovery, experts say.

“For every dollar they save on servicing their debts, they will probably go and spend that money elsewhere on other goods and services,” Paul Ashworth, chief U.S. economist for research firm Capital Economics, told The Journal.

Consumer spending drives about 70 percent of the U.S. economy.

Confidence in the economy, however, has taken a beating due to political gridlock in Washington over how to avoid the fiscal cliff, a recessionary year-end combination of tax hikes and deep spending cuts due to take effect at the same time.

The Thomson Reuters/University of Michigan’s preliminary December consumer sentiment index plunged to 74.5 in early December, its lowest level since August, and well below November’s 82.7 reading and a median forecast of 82.4 among economists polled by Reuters.

“It seems that the average household is now paying attention to the fiscal cliff and that is the key takeaway from this report,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York, according to Reuters

“In recent months it surprisingly held up well even with the fiscal cliff headlines, but with the media picking up on the fiscal cliff even more people are now paying attention to it and the pullback in confidence is a reflection of that.”

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

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