The financial position of the household sector is getting stronger.
Two measures of financial health, the debt service ratio and the financial obligations ratio, have steadily improved over the last several quarters. The household debt service ratio (DSR) is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt. The financial obligations ratio (FOR) adds automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance, and property tax payments to the debt service ratio.
According to the Federal Reserve, the FOR is at 17.76 percent – its lowest level since the first quarter of 2001 when it was 17.72 percent. The DSR at the end of the third quarter was 12.85 percent. The last time it was this low was nine years ago, when it was 12.73 percent.
The household sector still faces formidable headwinds in a weak job market. But these recent improvements with respect to servicing debts and other financial obligations – coupled with the news that household net worth is increasing – makes us more hopeful that consumers will step up their spending in the coming months.