Between 2000 and 2007, U.S. households nearly doubled their outstanding debt to $13.8 trillion—an unprecedented amount in both nominal terms and as a ratio of liabilities to disposable income (138 percent). But as the global financial crisis worsened at the end of 2008, a shift occurred: U.S. households for the first time since World War II reduced their debt outstanding.
MGI research shows that the economic impact of further U.S. consumer deleveraging will depend on income growth. If household incomes stagnate, each percentage point reduction in the debt-to-income ratio would require nearly one percentage point more personal saving. And each extra point in the saving rate would mean more than $100 billion less spending—a serious potential drag on economic growth. But with rising incomes, households can reduce their debt without having to trim consumption as much.
Any change in U.S. consumer behavior could have profound implications. From 2000 to 2007, personal consumption accounted for 77 percent of real U.S. GDP growth. And the United States has accounted for one-third of the total growth in global private consumption since 1990.
These trends were fueled by rising U.S. household debt and a decline in the personal saving rate to a low of –0.7 percent in 2005. As consumer spending has plunged in recent months, the saving rate has rebounded, reaching 5 percent in January 2009.
If consumers continue to reduce their debt, the effect on consumption will depend on income growth. For example, if incomes grow by 2 percent per year, households could reduce their debt-to-income ratio by five percentage points with a saving rate of just 2.3 percent. This would require $254 billion less spending per year. Without income growth, the same reduction in leverage would require more than twice as much saving, or $535 billion less consumption.
Debt and Deleveraging: The global credit bubble and its economic consequences The recent bursting of the great global credit bubble has left a large burden of debt weighing on many households, businesses and governments around the world, as well as on the broader prospects for economic recovery in countries around the world. Read more
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McKinsey conversation Authors Susan Lund and Charles Roxburgh examine how the crisis rolled through the global financial system—and discuss the implications for the future of the global economy. Listen to the podcast
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Mapping global capital markets: Fifth annual report The world's financial assets rose to $196 trillion in 2007, slightly below the pace of 2006 but still faster than the historical trend—likely marking the recent peak for equity and private debt markets. Read more
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Serving aging baby boomers Baby boomers have rewritten the rules at every stage of their lives. They will rewrite the rules of retirement as well. Review Summary
Mapping global capital markets: Fourth annual report MGI's analysis highlights trends in the global financial markets across countries, regions, and asset classes. It finds assets reached $167 trillion in 2006, while capital flows climbed to a record $8.2 trillion. Read more
