Uncertainty is highlighted by falling debt service

Since the start of the recession, the debt service ratio has fallen at its fastest pace in over a quarter of a century.

The reason behind the dramatic decline is fairly simple.  Consumers have cut back on spending and borrowing – we refuse or are simply unable to tap our homes like an ATM machine as we did in the prior decade. And the hurdle to take on new debt for purchases has risen.



Falling interest rates have also been a big help, along with modest repayment of debt and consumer defaults on loans.

In normal times, the extra cash in our wallets might provide the fuel that would power consumer spending and put the economic recovery on a much more solid foundation.

But these are anything but normal times.

Instead, most of us have chosen to save the extra cash.  And we can detect the new-found interest in rainy day funds simply by looking at the rise in the savings rate.

Following the relatively mild 1990-91 recession, it took nearly four years for the DSR to bottom.

This time around, the recession, which was caused by a financial crisis, has has been far more severe.  And contractions that spring from a financial crisis, versus ones caused by high interest rates, historically have produced weak economic recoveries.

To almost no one’s surprise, the recovery this time around has fit that pattern.

Consequently, there is far more uncertainty among consumers, which has slowed spending.  And businesses, which are flush with cash, have been reluctant to hire, taking a wait and see attitude.

All of this suggests we won’t be seeing any surge in growth over the next year or two (or more?) as consumers continue to focus on savings.

One final note: savings and debt service are inversely related with a correlation of –0.67 since 1985, where 1 equals perfect correlation, minus 1 equals perfect inverse correlation and 0 equals no correlation.

Not too surprising.

However, the recent surge in gasoline prices appears to have been mostly financed by savings, which suggests that the pullback in gasoline prices over the past two months, though a psychological boost, may serve only to replenish the modest draw down in bank accounts.