The financial obligations ratio measures the share of after-tax income consumers need to make their monthly recurring payments. These payments include mortgages (principal, interest, property taxes, and homeowners' insurance), rent, car loans and leases, as well as debt service on credit cards, student loans, and other kinds of signature loans. In fact, if someone has stopped paying their mortgage and is waiting for the sheriff to kick them out at foreclosure, they are still obligated to pay their mortgage and so those payments still count in the ratio. What's left over after all these obligations is the money consumers can use to buy new goods and services.
The data go back to 1980 and the obligations ratio hit a record high of 18.85% back in 2007. Last Friday the Federal Reserve released its latest data through the first quarter of 2011, which show that obligations now total only 16.39% of after-tax income, the smallest share since 1994. The decline in the past few years has primarily been among homeowners who have reduced both their mortgage and consumer obligations. Renters' obligations have also declined.
These lower payments mean consumer purchasing power can grow at or faster than the pace of income.
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Posted on Monday, June 20, 2011 @ 12:33 PM
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