Earlier this week the Federal Reserve issued its quarterly report on households’ financial obligations. It showed that financial obligations in the third quarter were at an 18-year low of 16.15% of after-tax income. This was unchanged from the second quarter and the lowest level since 1993.
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.
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 at a 3.6% annual rate over the past six months while personal income has been up at only a 1.4% rate. 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.