After three years of cautious spending and paying down debt, American households have significantly improved their balance sheets. Yet consumer confidence slipped in December as more people worried about the job outlook.

The latest survey from Conference Board showed a decline, despite two months of increases and a jump in holiday spending.  In December, consumer confidence stood at 52.5, well short of the 90 suggesting a healthy economy, but not much different than a year earlier.

Economists have raised their growth forecasts for the final months of the year and 2011, amid reports of slowing layoffs and more business and consumer spending. Still, home prices are falling, and the unemployment rate increased.

Household balance sheets have significantly improved. In the fall of 2007, 14% of the after-tax income in U.S. households went towards paying mortgages, credit cards and other consumer loans. Add in other financial obligations, such as auto lease payments, rents, homeowners' insurance and property tax payments, and nearly 19% of household income was consumed.

In the third quarter of this year, those numbers fell to just under 12 % and 17%, which translated to a drop in payments of $228 billion a year. That leaves more money to save and invest. Or spend--helping to explain why stores had their best holiday shopping season since 2006.

Before the financial crisis hit, U.S households and businesses were spending more than they were taking in by about 4% of GDP, according to an analysis by Goldman Sachs. Then, between mid-2006 and mid-2009, there was a swing equal to 12.5% of GDP as businesses and households saved.

Some of the lower debt has to do with reduced home equity lines of credit and tighter standards for other loans. Some potential homebuyers couldn’t get mortgages and many spent less because they had lost income or feared losing a job. 

However, there may be a long-term shift to frugality.  Until 2009, consumers were increasing their non-mortgage debt obligations each year. In 2009, net borrowing other than mortgage was a small negative, down $13 billion.

"Since consumers had been borrowing an average of over $200 billion per year between 2000 and 2007, this indeed looks like a change in behavior," wrote the authors of a November report from the Federal Reserve Bank of New York.

Consumers tightened spending much more drastically in this recession than in others. Consumption declined by 1.7% a year on average and in the first year of the recovery that began in mid-2009, consumption increased only 2%. 

In the six recessions before this one, spending slowed down to a 0.7% rate instead of falling, and consumption rose by 4.4% in the first year of recovery. Especially if more jobs open up as a result of moderately increased spending, all this is good news for the U.S. economy.

A cautionary note: The economy-wide figures don’t account for the fact that some Americans are still heavily indebted. As Karen Dynan at the Brookings Institution points out, "It was the most heavily indebted households that played a key role precipitating the trouble in mortgage markets that spurred the financial crisis.”  Dynan argues that the government needs to collect better data to prevent another crisis.

Temma Ehrenfeld writes for Financial Planning.Follow EBN on: Twitter | Facebook | LinkedIn | Podcasts

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