Making progress on household debt
The gloom in the markets over the economy is palpable, with Europe stumbling and China slowing. Well, here’s a slight sliver of good news. American households continue to make progress reducing debts. That said, there remains a considerable way to go.
American households boosted their debts for 6 decades. The real break in the borrowing-to-income trend came with the loan surge in the 2000s. The ratio of household debt to income soared. The epicenter of the borrowing frenzy was the housing market, although credit cards, auto loans, student loans and other debts also rose sharply. Meanwhile, incomes were stagnant to down. Of course, as we all know, the housing boom went bust. The economy cratered.
Yet by the second quarter of 2011 — three years after the start of the global economic crisis — the household debt ratio is down 11 percent from its peak.
At the current rate of household debt reduction–as you can see from the chart–borrowing could return to trend as of mid-2013. The calculations are by McKinsey & Co. The consultants checked their estimate by comparing U.S. households today to those of Sweden and Finland during the 1990s.
The Scandinavian countries went through banking crises similar to ours, recessions, and deleveraging episodes. As you can see from the chart, in both Sweden and Finland, the ratio of household debt to income fell by roughly 30 percent from the peak. The U.S. is closely tracking Swedish experience. Households in Spain and the United Kingdom have only just begun to deleverage, add the consultants.
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