Consumer Comeback Blog

Economy Starting to Look Good for 2013

It’s no secret U.S. households have been working on reducing their debt burden. The focus has been so intense that over the last four years U.S. consumers have been able to shed $1 trillion in debt, mostly do to their unwillingness to take on new debt and partly because so many people walked away from so much debt, the Wall Street Journal reported.

While the reductions have been beneficial at the household level, consumers still face difficulties. According to the Journal report, U.S. households are spending 10.98% of their income on debt—whether mortgages or credit cards—which makes up 17.6% of household assets.

Overall consumer-debt is nearly 85% of the U.S. gross domestic product, CNBC reported. Although it is still high, the debt-as-percentage of the GDP metric has dropped considerably over the last five years. At the start of the recession consumer debt was nearly double the GDP, analysts now predict that it will be reduced to only 75% of the GDP by the end of next year.

The Federal Reserve is hoping that the third round of quantitative easing, or QE3, that was announced last week will help improve household debt. As Bloomberg reported Fed policy makers have an open-ended plan to purchase $40 billion worth of mortgage debt a month in an attempt to increase consumer spending and reduce unemployment.

CNBC reported that even a modest growth in consumer spending, about 2.7%, will add over 200,000 jobs per month. By pursuing a policy designed to create artificially low interest rates the Fed has created an environment that has encouraged homeowners to refinance their mortgages, which led to $597 billion worth of home loans being refinanced, reported the Journal.