Some economists, like David Rosenberg, think the answer is substantially less—and for years to come. For quite a while now, Rosenberg has been writing about how the American consumer is due for a serious deleveraging, which means less spending, and how this is the real conversation we should be having. Forget about trolling the stock market and production data for green shoots. I’ve recently followed his lead and written this story.
In it I talk a lot about how much debt we have, as measured by the household debt-to-income ratio:
One way to understand the Great Consumer Retrenchment is to look at the amount of debt the typical household carries as a percentage of its disposable income. The ratio of debt to income increased from about 35% in the early 1950s to about 65% by the mid-1960s, where it more or less stayed until the late 1980s. That’s when debt started its epic rise, hitting 100% of income in 2001 and going all the way up to 133% in 2007. That figure is now starting to fall. At the end of 2008, the debt-to-income ratio was down to 130%.
The Federal Reserve released new data (PDF) on household debt today. David Lang at the San Francisco Fed was nice enough to crunch the numbers for me: we’re now looking at a debt-to-income ratio of 127.5%. That’s a pretty startling fall to take place in just three months. Though we probably have quite a ways to go yet. Rosenberg, for one, thinks that to get back to a sustainable level, households have got another $3 to $5 trillion in debt to pay down—or default on. More on that here.