Fed "Flows of Funds" Data's Fascinating Economy Insight

Low interest rates have reduced the servicing costs.

This chart shows household debt service costs as a percentage of after-tax income. Debt service costs rose steadily from 1993 into 2007. The combination of falling interest rates and the level of debt has led to a sharp drop in debt service costs. At these levels of debt service, one would expect that households would be encouraged to expand their debt levels. However, the “hangover” from the debt crisis has not yet diminished.

As long as households are reluctant to borrow, economic growth will remain slow and inflation low. This combination should lead to moderate policy tightening from the FOMC and an extended business cycle. If borrowing were to increase, these conditions might change but, for the foreseeable future, we expect borrowing to remain sluggish and economic growth to remain weak as well.

This article is courtesy of Confluence Investment Management, a participant in the ETF Strategist Channel.

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This report was prepared by Confluence Investment Management LLC and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change. This is not a solicitation or an offer to buy or sell any security.