Household Debt and Aggregate Consumption Expenditures

This paper shows that the debt burden of households, as measured by the debt service to income ratio, is helpful in forecasting the future growth of consumption expenditures. Using data for the United States over the period 1960-97, I find a significant negative relationship between the debt-service ratio of households and future aggregate spending growth. This effect is statistically important for spending on durable goods and services, but not for spending on nondurable goods. Because almost 70 percent of spending on nondurable goods represents purchases of food and clothing (which are relatively nondiscretionary), I conclude that my results are consistent with the view that borrowingconstrained households will limit their discretionary purchases when faced with tightened lending standards following an increase in their debt burden.