A Hidden Strength of the American Economy: Household Debt to Income Ratio is Sinking

The financial health of American households continued to improve in the second half of 2018, pushing down the ratio of household debt to income for the ninth consecutive quarter.

The financial obligations of U.S. households fell to 15.3 percent in the third quarter of 2018, according to data from the Federal Reserve. That is close to the lowest levels hit over the past 40 years for which there is reliable data. It is down significantly from the recent peak of 15.7 percent in the third quarter of 2016.

The reversal of the upward trend in the household debt to income ratio is all the more remarkable because it has come at a time that American households were accumulating more debt.

“In fact, the total amount of consumer debt on U.S. household balance sheets was over $13.5 trillion and rising at the end of 3Q18, more than 21% higher than the peak reached in 2008 at the emergence of the financial crisis,” the investment management firm C.J. Lawrence said in a recent note.

That’s a difference from the big decline in debt to income ratios seen in the aftermath of the financial crisis, when households were rapidly deleveraging following the shock of the mortgage bubble imploding.

The reason the debt-to-income ratio have been improving is that after-tax household income has been rising even faster than indebtedness.

According to C.J. Lawrence, this suggests “that consumers may have learned their lessons from the 2008 financial crisis and are living within their means. That is good news for the economy and for select consumer related stocks.”