Economists and investors are justifiably concerned about U.S. consumers weighty debt burdens, with some saying it could take years before theyve shed enough debt to put them in a spending mood again. By one measure, though, theyre looking as financially sound as they have in almost a decade.
The Federal Reserves financial obligation ratio tracks how much the average American must cough up every month for rent and payments on credits cards and mortgages, as a percentage of disposable income. The ratio fell to 17.51% in the fourth quarter of 2009, down from a peak of 18.87% in early 2008 and the lowest level since the third quarter of 2000.
The falling ratio isnt all good news: In large part, it reflects the extent to which people have been defaulting on mortgage and credit-card debt. But it also suggests that U.S. consumers mountain of outstanding debt — which stood at 122.5% of annual disposable income as of the end of 2009 — might be more sustainable than its sheer size suggests, particularly if people have used this period of low long-term interest rates to refinance into fixed-rate mortgages.
To be sure, a return to the profligate spending of the boom years wouldn’t be the best foundation for a recovery, and the U.S. governments growing debts are more than making up for any improvement among consumers. But with their monthly cash flow improving, U.S. consumers might hit the mall again sooner than many expect.