Progress in deleveraging

In recent years households have been working hard to reduce their debt. Most economists say this effort is essential to provide a sound footing for an economic recovery. N.C. State University economist Mike Walden takes a look at how have we done and how much more debt reduction is needed.

“We’ve done well … collectively as a country. One measure of this shows that there’s been an 11 percent reduction in the household debt-to-income ratio, from the peak that we had prior to the recession. And maybe we need to see that ratio go down another 10 percent to get to acceptable levels. Some estimates suggest that this will take maybe another one or two years. But this is good progress.

“And as you indicated we really need to have those debt-to-income ratios down, because once that level is reached, an acceptable level is reached, then households will feel free to spend more money. And once they go out and spend more money, that will generate more growth in the economy.

“The other thing to note is we in this country have actually made more progress in this problem, which is really worldwide than several other countries — for example, the United Kingdom and Spain have much higher debt-to-income ratios right now. So this is a really key to getting … a sound economic foundation. And this is sparking some optimism among economists, in that this deleveraging may be coming to an end.”