Long Term Perspective

The debt-to-income ratio peaked in the fourth quarter of 2001, at the same time that the personal savings rate plunged in response to increase auto purchases. Trends improved since 2001 – but the personal savings rate fell sharply in 2005 and has remained only barely above zero since. In periods of economic uncertainty, or during recessions, consumers tend to add to savings and diminish debt burdens. Part of the decline may be related to the official savings data not capturing gains in home equity and with consumers spending out of home equity.

Short Term Perspective

The debt-to-income ratio actually has trended downward over the last two years, although the trend has had some ups and downs. The modest dip in this ratio since the recent highs in mid-2005 have largely reflected healthy income growth. Debt growth has only moderated slightly over this period. Savings have been revised out of negative territory but remain miniscule in the official numbers and again this is likely due to not including most of the home equity gains from gains in home prices. Slower consumer spending growth could potentially boost savings, but this would dampen overall economic activity. However, with inflation still a concern, some slowing would be welcomed by the Fed.