The Strength of Consumer Balance Sheets

Since the end of 1979, U.S. consumers have strengthened their balance sheets considerably. The growth of outstanding household liabilities fell from 14.3 percent in 1979 to an annual rate of 7.7 percent over the period 1979:IVQ to 1981:1VQ. Consequently, debt repayments relative to disposable personal income and outstanding liabilities relative to assets have fallen substantially from their high 1979 values. In several respects the improvement in consumer balance sheets has been more dramatic since 1979 than improvements in past recessionary periods. Indeed, this improvement is a key factor underlying forecasts of a consumer-led economic recovery later this year. However, there have been some marked changes in the composition of consumer assets in recent years and in the values of these assets in the past year. These changes could affect consumer behavior over the next several quarters in ways that may moderate the recovery in consumer outlays. This Economic Commentary discusses the significance of the recent changes in the composition of consumer balance sheets and speculates on the possible impact of these changes on consumer spending in the next several quarters.