Last week the Federal Reserve issued its quarterly report on households' financial obligations. It showed financial obligations in the fourth quarter were 15.93% of after-tax income, the lowest since 1984.
Financial obligations are all the recurring payments consumers must make each month for items they have already purchased. For example, it includes, mortgage payments (principal, interest, homeowners insurance, and property taxes), car loan payments, as well as debt service on credit cards and other loans, such as student loans. It also factors-in payments that are the economic equivalent of debt service, such as rent and car leases. In addition, if someone hasn't made their mortgage payment in a year or two and is waiting for the sheriff to show up and kick them out, the Fed still counts that amount as a financial obligation. Now that more states are letting banks and other lenders move forward with the foreclosure process, some occupants are going to have to move elsewhere and start paying rent. Because the rent they will pay will usually be less than the mortgage they were supposed to be paying – otherwise they would have had an incentive to pay the mortgage all along – foreclosures will put further downward pressure on this measure of obligations.
With financial obligations making up a smaller share of after-tax income, consumers are in a better position to increase their spending. This may help explain why nominal consumer spending is up 3.8% in the past year while personal income is up a smaller 3.6%. If financial obligations aren't impinging on family budgets as much as they were a few years ago, consumers should be comfortable, at least temporarily, raising their spending faster than their income.
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Posted on Friday, March 23, 2012 @ 3:18 PM
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