Here's a statistic that may shock you: The average US household owes 128% of disposable income. What may be more surprising is that's actually an improvement from the peak of 133% at the end of last year. To give you perspective, as recently as the mid-80's, the load was about half that amount. It's no wonder economists think it will be at least 6 years before consumers have a good handle on their debt.
Now, the good news. There has been significant progress on savings. The savings rate--which was actually negative for part of last year--is now up to almost 7%. That's not far from what economists say is the long-term average of about 9%.
Nearly everyone agrees that this shift in priorities is a necessary one if the economy is to get back on solid footing. But that doesn't mean it will be easy. For many people, it will mean redefining needs into wants. For others, it may mean smaller homes in less desirable locations.
What I wonder is whether the changes will stick. In general, people have a hard time changing their spending patterns. So, I wonder what will happen when the labor market stabilizes and home values start recovering. Will people quickly return to their reckless ways? What do you think?
Comments
Erika,
I'd like to see the data that went into determining the 7% savings rate because I have a hard time believing it. Consider---
1) Real unemployment is probably close to 18%. If people can't find a job, or stopped looking for a job or are working less than a full time job, how are they saving 7% of pay?
2) Many people who are fortunate to have jobs have had their pay frozen. If wages don't increase but cost of living does, where do they get 7% of pay to save?
3) Many people are accepting furloughs rather than layoffs. Many of these are 1 week each quarter. If wages are decreased by 8%, how are they finding 7% to save?
4) The amount of employees' contributions in 401(k) plans has decreased over the last 12 months. If people still with jobs are not putting money into retirement, how are they finding 7% to save?
Let's assume that 50% of the workforce fall into the above four categories. If the average savings rate is 7%---and this group is at zero--- that means the other 50% is saving 14%. I don't believe it.
Is there a direct relationship between the 5% decrease in debt and 7% increase in savings? Do these numbers say that people are saving to pay down their debt? If so, that's not what most of us would call savings. That's not increasing your assets; it's just decreasing your liabilities.
Unless lenders find a way to securitize bad mortgages again, package them and sell them to other investors, we've wiped out about 50% of the potential homebuyer market permanently. Which is a good thing for fiscal stability. However, all those homes built for that huge pool of eligible homeowners under lax standards means that home prices won't go up for a very, very long time. Smart investors will buy up huge tracts of vacant homes to build into rental empires, but that won't move the market that much.
In short, the wealth created in the past 8 years was largely built on home equity. That money is gone, and continues to shrink. Because it is not coming back any time soon, we're not going to really have to worry about "What if..." when prices move back up. You can ask that question in ten years, maybe.
Look at real wage growth over the past 20 years, then factor in inflation. We're boned. The only source of decent paying jobs for moderately skilled people were offshored over the same time frame.
If people can get back to even on their debt, we're looking pretty good. However, unless someone figures out how to get us out of this "service economy" we are not going to make any forward progress. We need to produce things again.
If we do have a scheme where unqualified people can get loans again, and property values go up at 20% per year again, people would return to their overspending habits in a heartbeat.