Consumers have reduced their debt burdens enough to be able to withstand higher taxes and help sustain the U.S. economy’s expansion, according to Pavilion Global Markets Ltd. strategists.
As the CHART OF THE DAY shows, mortgage and consumer-loan payments amount to the smallest percentage of after-tax income since 1983, according to quarterly statistics compiled by the Federal Reserve.
The debt-service ratio was 10.6 percent of disposable income in last year’s third quarter. Five years earlier, the figure peaked at 14.1 percent. Pavilion highlighted the drop yesterday in a report with a similar chart.
Household spending is poised to “strongly contribute to growth” this quarter and next, Pierre Lapointe, head of global strategy and research at the Montreal-based firm, and two of his colleagues wrote. Consumers account for about 70 percent of the economy, according to Commerce Department data.
Other indicators besides debt-service expense bode well for consumers, they wrote. The report cited a rebound in the housing market, the end of a decline in inflation-adjusted wages, and a slowdown in debt reduction.
Taken together, they will outweigh the economic effect of ending a temporary two-percentage-point cut in the payroll tax and possible automatic reductions in federal spending this year, the report said.