Federal Reserve Data shows Consumers Working Down Debt reports National Debt Relief

(EstateNewsWire.com, October 23, 2012 ) San Francisco, CA- Americans are paying down their debts, and one expert says that will give the economy a boost.

When the United States fell into recession in 2007, household debt was 134% of disposable income, a record high, according to Federal Reserve data. By the second quarter of this year, there was a fall to 113% debt-to-income ratio.

That’s a good sign, says Moody’s Analytics chief economist Mark Zandi.

“The household deleveraging process is largely over,” he told Bloomberg. “Credit use should soon go from being a significant headwind to the economy to a tailwind.”

Paying down personal debt will help the gross domestic product, Zandi said. GDP should increase 2.1% in 2013, less than the 2.2% forecast for this year, he said. But Zandi expects the economy’s private side will experience a 3.6% growth.

Retail sales were up in September for a second month, according to the Commerce Department. The increase was the biggest gain in consecutive months since late 2010.

More spending is good news for banks, insurers and investment companies, said James Paulsen, Wells Capital Management chief investment strategist. “The financial sector is the biggest beneficiary,” he said.

By keeping federal fund rates near zero, the Federal Reserve has helped Americans pay down their debts. And now homeowners are taking advantage of historically low mortgage rates to pay off their loans faster.

Refinancing is near its highest point in three years, and 40% of homeowners are reducing the term of their debt, said Mike Fratantoni, Mortgage Bankers Association vice president of research and economics. “People are opting for faster amortization,” he told Bloomberg.

Consumers are getting used to their post-Recession finances, Paulsen said. That shows in stronger home, car and light truck sales.

“We are seeing some big-ticket spending,” said the investment strategist. “They are things you don’t see unless you are pretty confident of your balance sheet.”

Some economists say that although the debt-to-income ratio has fallen, it still has a ways to go.

Nathan Sheets, head of international economics at Citigroup Inc. and former official at the Federal Reserve, said household deleveraging might take years. He expects the ratio to decline to the 100% mark.

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