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Friday, April 01, 2005

ACADEMIC: U.S. Household Debt Service

Karen Dynan, Kathleen Johnson, and Karen Pence, of the Board’s Division of Research and Statistics, prepared this article. David Brown provided researchassistance.

Changes in aggregate household debt in the United States may contain information about the current state of the economy and may influence its future path. When a large share of household income is devoted to debt repayment, households have fewer funds available to purchase goods and services. Households with high debt levels relative to income are also more likely to default on their obligations when they suffer an unanticipated misfortune such as job loss or illness. Thus, when household debt ratios are high and unemployment is rising, lenders may respond to the expected increase in defaults by limiting the availability of credit; this dynamic may further
weigh on spending.

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