Household Debt Flow Indicating Increased Durable Goods Spending
According to the Federal Reserve's Flow of Funds report, households added $98.4 billion in the fourth quarter of 2012. This was the largest increase in household debt flow since the fourth quarter of 2007. The increase in household debt is both good and bad news. It's good news because durable goods are typically bought with debt. So, as debt increases it indicates that more durable goods will be bought as the chart below shows (debt flow is monthly in the chart).
However, it is bad news in that households are still extremely overlevered. The chart below shows household debt as percentage of GDP. While the level of debt relative to the size of the economy has come down quickly over the last three years, we are still well above debt levels seen at any time since the 1950s. With growth in the economy stagnant, household debt levels need to reach 60% of GDP to approach anything near normal (debt levels prior to the real lift off of the housing bubble). That is equivalent to $3.32 trillion of additional debt that needs to be paid off or written off. Since the peak levels, households have only shed $1.02 trillion of debt. So, households taking on more debt (mostly for student loans and sub-prime car loans) isn't good for the long-term health of the economy.
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