The document examines whether rising household debt or energy costs were more responsible for the 2008 economic crisis. It analyzes three ratios: 1) household financial obligations as a percentage of income, which includes debt payments but not energy costs; 2) household energy expenditures as a percentage of income; and 3) total household obligations, which combines 1) and 2). While the financial obligations ratio rose in recent decades, the total obligations ratio declined from 1980 to 2000 due to falling energy costs. The total ratio surged in 2008, possibly better explaining the recession than the smaller rise in just the financial obligations ratio. The total obligations ratio has since declined substantially, suggesting consumer recovery may be quicker than expected.

1. October 13, 2009
Was the Consumer Burden Debt or Oil??!!
At the heart of a widespread impression the consumer is “cooked” is the U.S. household financial
obligations ratio published by the Federal Reserve and shown in Chart 1. This ratio calculates
household “fixed expenses” as a percent of disposable personal income, including debt service
payments, auto lease payments, rental payments, insurance payments, and property tax payments. For
many, the continual advance in this ratio during the last 30 years leaves an impression of a drunken
sailor chronically spending beyond his means, and therefore, it was no surprise when the sailor
eventually fell into the gutter under his own weight.
Chart 1
U.S. Household Financial Obligations Ratio*
*Includes all debt payments (principal and interest) on outstanding
mortgage and consumer debt, auto lease payments, rental payments
20%
on tenant-occupied property, homeowners' insurance, and property tax
payments as a percent of Disposable Personal Income.
Source: Federal Reserve
2008Q1 @ 18.8%
19%
18%
2009Q2 @ 18.05%
17%
16%
15%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
The ongoing fear is there is no quick fix to this budgetary hangover as many of these “fixed
expenses” can only be lessened by the passage of time. Consequently, several believe Chart 1 has
sentenced the U.S. consumer—and accordingly, the overall U.S. economy—to a prolonged period of
subpar growth. The Federal Reserve recently updated this ratio through the second quarter of 2009
and several points surrounding this household burden merit consideration.
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2. Examining the Financial Obligations Ratio?!??
As illustrated in Chart 1, the financial obligations ratio has improved surprisingly fast since it peaked
in the first quarter of 2008. Already, the burden has dropped from 18.8 percent to about 18 percent
due to a combination of write downs of bad debt, some runoff of debt not replaced, and lowered
payments through refinancing. In any event, from its peak, the ratio has already declined by more in
the last five quarters than it rose between the end of 2001 and the beginning of 2008! Lest you think a
0.75 percent drop in the obligations ratio is not much to consider since the mid-1980s this ratio has
rarely been outside the range of 17 percent to 19 percent. At about 18 percent, it has already retraced
almost 50 percent (about 1 percent of a 2 percent range) of its historic range during the last 25 years,
it is little different than it was in 1987 and less than it was in 2001.
We also note the financial obligations ratio has changed little in the last decade. Although it rose
some between 2006 and 2007, does the rise in recent years really explain the complete collapse of
consumer spending and the economy in 2008? Or, could other factors be equally responsible? In
particular, was the 2008 economic collapse primarily the result of a rising household financial
obligations ratio or was it due to a surge in household energy costs?
2008 Crisis ….. A Debt Crisis or an Energy Crisis???!
We fail to understand why energy cost (also an essential and largely “fixed expense” for most
households) is not included in the household obligations ratio (particularly since the obligations ratio
seems to include almost every other “necessary” household expense). Chart 2 illustrates the U.S.
household energy obligations ratio (i.e., household spending on energy goods and services as a
percent of disposable personal income). In the last 30 years, as a proportion of overall disposable
personal income, the oscillation in the energy burden has actually been larger than changes in the
financial obligations burden. Since 1980, the energy burden has fluctuated by about five percentage
points (between about 3.5 percent and 8.5 percent), whereas the obligations ratio has swung by only
about 3.5 percent (from 15.5 percent to about 19 percent). Therefore, changes in the energy burden
are at least as important as changes in the financial obligations ratio in determining household
behaviors. Indeed, is the household recession of 2008 better explained by an approximate 1 percent
increase in the financial obligations ratio during the recovery or by the almost 3 percent surge in the
household energy burden over the same period?
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3. Chart 2
U.S. Household ENERGY Obligations Ratio**
**Total Household Expenditures on Energy Goods and Services as a
percent of Disposable Personal Income.
8.5%
8.0%
7.5%
7.0%
2008Q3 @ 6.3%
6.5%
6.0%
5.5%
5.0%
4.5%
4.0% 2009Q2 @ 4.4%
3.5%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Is the U.S. Consumer Rational or Simply Foolish????
A widespread and common perception is the U.S. consumer has simply been irresponsible! For the
last 30 years, U.S. households have continuously spent beyond their means, destroying savings and
leading to an ever-rising debt burden. For many, the secular rise in the financial obligations ratio
shown in Chart 1 reflects years of consumer imprudence, which has now sentenced the U.S.
consumer to a prolonged period of slower “new-normal” growth.
However, a very different interpretation emerges when Chart 2 is considered in conjunction with
Chart 1. The chronic rise in the financial obligations ratio may simply reflect a rational augmentation
of debt in substitution for energy budget savings (i.e., a persistent decline in the household energy
obligations ratio). The consumer, rather than illustrating ignorance about long-run financial health,
simply took rational advantage of energy savings to raise commitments elsewhere. For example,
between 1980 and 2004, even though the financial obligations ratio rose by about 2 percent, the
energy obligations ratio declined during the same period by almost 4 percent! The fact the consumer
chronically took on more debt and persistently increased their financial obligations ratio during this
period was not evidence of foolishness. Rather, considering the energy obligations burden declined
faster than the financial obligations ratio rose, this period actually illustrated an era of household
conservatism!
The “TOTAL” Household Burden!?!?
Chart 3 combines the financial obligations ratio with the energy obligations ratio to illustrate the U.S.
household “total” obligations ratio. Despite a persistent rise in the financial obligations ratio (Chart
1), the total household obligations ratio persistently declined between 1980 and 2000 and remained
very modest until 2006. Compared to the financial obligations ratio, we believe the “total” household
obligations ratio better explains why U.S. consumption has remained stronger than most thought
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4. possible during much of the last couple decades, why the consumer did not recess during the 2001
recession (even though the financial obligations ratio was very high by historic standards) and why
the U.S. consumer finally capitulated in 2008 once the “total” obligations ratio surged above its
record 1980 levels. Chart 1 suggests the U.S. consumer went on a spending spree for almost 30 years
even though its “fixed expenses” burden was chronically rising to record highs. By contrast, Chart 3
shows a steady decline in the total household burden (including energy costs) is probably what
sustained the prolonged U.S. household spending spree. Chart 1 leaves a conundrum as to why the
record high financial obligations ratio in 2000 did not produce a consumer recession. Chart 3 shows
the consumer did not shut down in 2000 because the “total” obligations ratio was near a record low!
Finally, Chart 1 does not show a rise in the obligations ratio commensurate with the severity of the
2008 calamity, whereas Chart 3 clearly shows a surge in the household “total” obligations ratio prior
to the recessionary collapse.
Chart 3
U.S. TOTAL Household Financial Obligations Ratio
Adjusted for Energy Outlays***
***Includes all debt payments (principal and interest) on outstanding mortgage
and consumer debt, auto lease payments, rental payments on tenant-occupied
25.0% property, homeowners' insurance and property tax payments, AND Total
Household Expenditures on Energy Goods and Services. All these outlays shown
as a percent of Disposable Personal Income.
24.5%
2008Q1 @ 24.9%
24.0%
23.5%
23.0%
22.5%
22.0%
2009Q2 @ 22.5%
21.5%
21.0%
20.5%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Hope for the U.S. Consumer???!
The household financial obligations ratio illustrated in Chart 1 does not give much hope for a quick
revival in U.S. consumption spending. Although the obligations ratio has declined some from its peak
in 2008, its decline thus far is only modest (less than 1 percent). Moreover, debt burdens can only
improve slowly over time as new debt is postponed, or existing debt is either written off or
refinanced. Consequently, this chart supports the widely held contention that U.S. consumer spending
will likely remain anemic for several years.
However, the “total” household obligations ratio (Chart 3) has already experienced substantial
improvement. This ratio has declined by 2.5 percent from its high in early 2008 and is as low today as
it was in 2000! Moreover, the total obligations ratio is currently below its average since 1980. The
swift and significant drop in the U.S. household “total” obligations ratio since the first quarter of
2008 suggests a quicker and more substantial consumer revival than most now anticipate.
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5. Summary …… Perhaps the U.S. Consumer will Surprise?!?!
A widespread perception the U.S. consumer is buried under a mountainous debt burden has given rise
to a strongly held consensus view that household spending and the overall U.S. economy is sentenced
to a prolonged period of subpar “new-normal” growth. However, as this note suggests, perhaps
surging energy costs during 2007-08 rather than oppressive debt burdens is what ultimately pushed
the consumer into recession. If this is the case, then a near-term revival in job creation combined with
a significant 2.5 percent decline in the “total” U.S. household obligations ratio may produce a
consumer recovery next year that proves swifter and stronger than most now anticipate!?!
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