Household Deleveraging Slows

The chart shows the ratio of household net worth to disposable income, which reflects household balance sheets; and the personal savings rate. The purple line is the 25-year average of the NW/DPI variable.

Federal data on consumer credit continued to show individuals shying away from taking on new debt. How quickly households are repairing balance sheets? An important factor preventing a robust economic recovery is deleveraging, as households and businesses pay down debts and restore net worth to long-run norms.

A consequence of deleveraging is an elevated personal savings rate, which holds down levels of consumption and investment and slows economic growth.

The Great Recession took a toll on household wealth. Peaking in the middle of 2007 at a value of 6.35 of NW/DPI (households' net worth totaled 6.35 times current income), that measure reached a minimum of 4.5 in the first quarter of 2009 during the depths of the Great Recession.

As a result of this decline in the conditions of household finances, the rate of personal savings increased from 1.8 percent in the third quarter of 2007 to a recent high of 7.2 percent in the second quarter of 2009. Since that peak, the savings rate has declined to 5.1 percent for the first quarter of 2011 (and stood, on a monthly basis, at 4.9 percent for April 2011).

This decline in the savings rate has run counter to some market analysts' forecasts that the savings rate would in fact climb again, perhaps higher than 8 percent.

Nonetheless, while the deleveraging process continues, it has slowed. Current data and ongoing stock and housing price declines in the second quarter 2011, suggest that the historical level for household net worth will be reached in the fourth quarter of 2011.

Since 2009, as NW/DPI increases, the savings rate should continue to fall. Over the long-run, the rate should return to the 3 percent to 4 percent range, thereby freeing household budgets for consumption and investment and promoting more robust economic expansion.

- Courtesy of NAHB