Trends in Households' Debt Burden

For many years, the Federal Reserve Board has been measuring the debt burden of households by taking the sum of the monthly payments on consumer debt and mortgage debt payments as a percentage of their disposable (after-tax) income. Note that the payments include both interest and reduction of debt. The debt burden is assessed by calculating the debt payments for each quarter as percentages of consumers' after-tax income. The larger that percentage, the higher is the expected level of delinquencies and charge-offs. Recall that the recession began in March 2001. At that point the percentage of debt payments to after-tax income had reached 14.12 percent, the highest debt-payment ratio since the second quarter of 1987 (14.19 percent). Clearly, changes in the level of the household debt burden are worth watching as a possible warning signal of higher collection costs and potential credit losses. Of course, the problem is not that your firm has been overly generous in extending credit; it's those other guys.

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