by Calculated Risk on 12/17/2006 11:59:00 PM

Dr. Christine Chmura, president and chief economist at Chmura Economics & Analytics, says the economic pessimists aren't looking at the complete picture. She writes in the Richmond Times-Dispatch: Consumer debt high, but there's more to the story.

"...the Fed reports that household debt service payment (interest and principal) of homeowner mortgages relative to disposable personal income was 11.6 percent in the second quarter of 2007, the highest ratio on record since the data were first calculated in 1980.

Combining mortgage debt, consumer debt and other financial obligations -- auto leases, rental payments, homeowners insurance, property-tax payments gives the broadest view of debt for households.

Once again the Fed reports that this debt-service ratio for households is the highest on record: 14.4 percent of disposable personal income.

Couple this information about consumer debt with a significant slowdown in home-price acceleration, and pessimists point toward a soon-to-occur recession."

But Chmura says:

"[The pessimists] haven't looked at the complete picture.

A full balance sheet reflects assets as well as liabilities. As of the third quarter of 2006, household assets were at a record $67.058 trillion. Rising values in real estate and equities contributed to the increase.

More important, net worth hit a record $54.063 trillion during the same quarter.

So ... when the bills roll in over the next month, just remind yourself that the consumer engine that fueled an expansion still has the ability to support more spending and keep the economy robust."

Never mind that Chmura mixes flows with stocks, more importantly she could have written this piece in mid-1990 - just as the early '90s recession started.

Chmura notes that the mortgage portion of the homeowners financial obligation ratio (FOR) was a record 11.6% in Q2 2006. In Q2 1990, the ratio was a then record 10.9%. The Q2 2006 debt service ratio (DSR) was a record 14.4%; in Q2 1990 it was a near record 11.96%. And in Q2 1990, pessimists were also concerned about "a significant slowdown in home-price acceleration".

But if someone just looked at the household balance sheet in Q2 1990, everything looked great (Fed: Flow of Funds). Assets were a record $23.7 Trillion and net worth hit a record $20.1 Trillion in Q2 1990.

And then the recession started ...