What Is Average Propensity to Consume?

Average propensity to consume (APC) measures the percentage of income that is spent rather than saved. This may be calculated by a single individual who wants to know where the money is going or by an economist who wants to track the spending and saving habits of an entire nation.

In either case, the propensity to consume can be determined by dividing average household consumption, or spending, by average household income, or earnings.

Understanding Average Propensity to Consume

From the broader economic view, a high average propensity to consume is generally good for the economy. When the average propensity to consume is high, consumers are saving less and spending more on goods or services. This increased demand drives economic growth, business expansion, and broad employment.

Low-income households are often seen as having a higher average propensity to consume than high-income households. Low-income households may be forced to spend their entire income on necessities with minimal disposable income remaining to save. Alternatively, high-income households with higher cash flow after their necessities are met typically have a relatively lower average propensity to consume.

Economists often gauge economy forecasts on actions by the middle-income households. The spending and savings patterns of this demographic often indicate a degree of confidence or pessimism about their own personal financial situations and the economy as a whole.

Propensity to Consume vs. Propensity to Save

The sum of the average propensity to consume and the average propensity to save is always equivalent to one. A household or a nation must either spend or save all of its income.

The inverse of the average propensity to consume is the average propensity to save (APS). That figure is simply the total of income minus spending. The result is known as the savings ratio.

Notably, the savings ratio is normally based on its percentage of disposable income, or after-tax income. An individual determining personal propensities to consume and save should probably use the disposable income figure as well for a more realistic measure.

Example of Average Propensity to Consume

Assume a nation’s economy has a gross domestic product (GDP) equivalent to its disposable income of $500 billion for the previous year. The total savings of the economy was $300 billion, and the rest was spent on goods and services.

The nation’s APS is calculated to be 0.60, or $300 billion/$500 billion. This indicates the economy allocated 60% of its disposable income to savings. The average propensity to consume is calculated to be 0.40, or (1 – 0.60). Therefore, the nation spent 40% of its GDP on goods and services.

APS can include saving for retirement, a home purchase, and other long-term investments. As such, it can be a proxy for national financial health.

Special Considerations

The marginal propensity to consume (MPC) is a related concept. It measures the change in the average propensity to consume.

Assume that the nation in the previous example increased its GDP to $700 billion and its consumption of goods and services rose to $375 billion. The economy’s average propensity to consume increased to 53.57%.

The nation’s consumption increased from $200 billion to $375 billion. Alternatively, the nation’s GDP increased from $500 billion to $700 billion. The nation’s marginal propensity to consume is 87.5% ($375 billion – $200 billion) / ($700 billion – $500 billion). The marginal propensity measures the directional trend of how an entity is utilizing its money. In this case, 87.5% of new growth was further consumed.

What Is the Asian Development Bank?

The Asian Development Bank’s primary mission is to “foster economic growth and cooperation” among countries in the Asia-Pacific Region. Founded in 1966 and based in Manila, Philippines, the ADB assists members and partners by providing loans, technical assistance, grants, and equity investments to promote social and economic development.

The ADB has been responsible for major projects in the region and raises capital regularly through the international bond markets. The ADB also relies on member contributions, retained earnings from lending, and the repayment of loans for the funding of the organization.

How the Asian Development Bank Works

The Asian Development Bank provides assistance to its developing member countries, the private sector, and public-private partnerships through grants, loans, technical assistance, and equity investments to promote development. The ADB regularly facilitates policy dialogues and provides advisory services. They also use co-financing operations that tap official, commercial, and export credit sources while providing assistance.

Membership in the ADB is open to members and associate members of the United Nations Economic Commission for Asia and the Far East. It’s also open to other regional countries and non-regional developed countries that are members of the U.N. or of any of its specialized agencies. 

Financing Provided by the Asian Development bank

The ADB provides both private financing and sovereign (public) financing. Private sector efforts focus on projects that help promote private investments in the region that will have significant development impact and will lead to accelerated, sustainable, and inclusive growth. Public-sector financing provides funding for member countries with flexibility in determining how they can achieve development goals.

In 2021, the ADB committed nearly US$13.5 billion to help its developing member countries address the impacts of the COVID-19 crisis and address vaccination needs, and has mobilized a further $12.9 billion in co-financing from partners. Through a $9 billion Asia Pacific Vaccine Access Facility, or APVAX, announced in December 2020, the ADB provided funding for vaccine procurement, logistics, and distribution.

The total private financing portfolio consisted of $14.2 billion at the end of 2021. In terms of sovereign financing, ADB’s portfolio stood at $104 billion by the end of 2021, consisting of 713 loans, 392 grants, 915 TA projects, one guarantee, and 1 equity investment.

Structure of the Asian Development Bank

According to ADB’s website, “the Agreement Establishing the Asian Development Bank, known as the ADB Charter, vests all the powers of the institution in the Board of Governors, which in turn delegates some of these powers to the Board of Directors. The Board of Governors meets formally once a year during ADB’s Annual Meeting.” The ADB’s highest policy-making body is its Board of Governors, which comprises one representative from each member.

The two largest shareholders of the Asian Development Bank are the United States and Japan. Although the majority of the Bank’s members are from the Asia-Pacific region, the industrialized nations are also well-represented. Regional development banks usually work in harmony with both the International Monetary Fund (IMF) and the World Bank in their activities.

Asian Development Bank Country Relationships

When ADB was founded in 1966, it consisted of 31 members. Since then, membership has grown to 68 members, which is made up of 48 regional and 19 non-regional members. Membership as of 2022 includes:

What Are 60-Plus Delinquencies?

The 60-plus delinquency rate is a metric that is typically used for the housing industry to measure the number of mortgage loans that are more than 60 days past due on their monthly payments. A 60-plus delinquency rate is often expressed as a percentage of a group of loans that have been underwritten within a specified time period, such as one year.

Understanding 60-Plus Delinquencies

The 60-plus delinquency metric can also be used for auto loans and credit cards. The 60-plus delinquency rate is helpful because it shows creditors and lenders whether consumers are falling behind on their payments and if they’re likely to default on their loans.

The 60-plus rate may be split into prime loans and subprime loans. Subprime loans are for borrowers with a poor credit history. The 60-plus delinquency rate on subprime loans is typically higher than for prime loans. Oftentimes, 60-plus rates are published separately for fixed-rate loans versus adjustable-rate loans, which have a variable rate and might have the option to reset to a fixed rate later in the term.

Monitoring the 60-day rates, as well as other delinquency rates for borrowers, can provide enormous insight into the financial health of consumers in an economy. If economic conditions are favorable, meaning steady economic growth, then delinquency rates tend to fall.

Conversely, as economic conditions deteriorate, unemployment tends to rise as consumers are laid off from their jobs. With less income, it becomes more difficult for consumers to make their mortgage payments, leading to a spike in delinquencies throughout the economy. 

Also, banks and mortgage lenders track delinquency rates since any interruption in mortgage payments represents a reduction in revenue. If delinquencies persist in a poorly performing economy, bank losses can rise as fewer mortgage payments are received, which leads to fewer new loans being issued. Fewer loans being issued to consumers and businesses can exacerbate the already-poor conditions within an economy, making a recovery more challenging.

60-Plus Delinquencies vs. Foreclosure

The 60-plus delinquency rate is often added to another negative event measure: the foreclosure rate for the same group of loans. The two metrics provide a cumulative measure of the individual mortgages that are either not being paid or being paid behind schedule.

Since 60-plus delinquencies are less than 90 days, the loans have yet to enter the foreclosure process. Foreclosure is the legal process in which a bank seizes a home due to default or nonpayment of the mortgage payments by the borrower. Although each lender may differ, typically 90 to 120 days past due, a home loan enters the pre-foreclosure process.

When a borrower is 90 days past due, the lender usually files a notice of default, which is a public notice submitted to the local court stating that the borrower’s mortgage loan is in default. Borrowers can still try to work with their bank to modify the loan at this point in the process.

If the loan payments are still not made beyond the 90- to 120-day period, then the foreclosure process moves forward. The bank will eventually seize the home, and an auction will be held to sell the home to another buyer.

Mortgage-Backed Securities (MBS)

Mortgage loans are sometimes grouped into a pool of loans that make up mortgage-backed securities (MBS). An MBS is sold to investors as a fund in which they earn interest from the mortgage loans. Unfortunately, investors often have no idea whether the loans that comprise the MBS are current—meaning that the borrowers are not behind on their payments.

If the delinquency rate on past-due mortgages rises beyond a certain level, then the mortgage-backed security may experience a shortfall of cash, leading to difficulty making the interest payments to investors. As a result, a re-pricing of the loan assets can occur, resulting in some investors losing a portion or most of their invested capital.

Special Considerations

Homeowners are usually at risk of losing their homes in an economic downturn. But certain protections were put in place to help homeowners affected by the COVID-19 pandemic. In 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which included a provision that allowed borrowers to skip their mortgage payments for up to a year—a process called forbearance. It also provided a moratorium on evictions.

The moratorium on foreclosures and evictions for enterprise-backed mortgages, including those backed by the U.S. Department of Agriculture (USDA) and the Federal Housing Administration (FHA), has been extended several times. The forbearance expires on Sept. 30, 2021.

The U.S. Centers for Disease Control and Prevention (CDC) announced a temporary halt on evictions in counties with substantial or high levels of community transmission of COVID-19. The mandate was set to expire on Oct. 3, 2021, but a U.S. Supreme Court ruling ended this protection on Aug. 26, 2021, by striking down the moratorium.

Below are some of the steps and key portions of your rights under the forbearance program that borrowers can opt into if they’re delinquent on their mortgage payments.

Call Your Lender

Borrowers must contact their lender or bank that issued the mortgage loan and request forbearance. Borrowers mustn’t stop their mortgage payments until they are approved for forbearance from the lender.

You Still Owe the Payments

If approved, forbearance will cause any of your skipped payments to be added to the end of the loan’s term, meaning that the length of the loan will increase. In other words, borrowers still need to make those payments, but instead of making the payments in the next few months, those payments will be added to the end of the payment schedule for the mortgage.

No Penalties

The good news is that there are no penalties for delaying the payments as a result of forbearance. Also, the missed payments won’t hurt your credit score, which is a numeric representation of your creditworthiness and ability to pay back your debt.

Qualifications

Not all mortgage loans qualify. The program typically limits approval to mortgages that are backed or funded by government-sponsored enterprises (GSEs), such as Fannie Mae or Freddie Mac. As a result, it’s important to contact your lender to see what type of mortgage you have. As mentioned above, the emergency measures signed during the COVID-19 pandemic affect mortgages backed by agencies such as the USDA and the FHA.

Example of 60-day Mortgage Delinquencies

The Mortgage Bankers Association (MBA) tracks mortgage delinquency rates for the U.S. economy. The mortgage delinquency rate peaked at 8.22% in the second quarter (Q2) of 2020 but fell to 6.38% within three quarters as of the first quarter (Q1) of 2021. This was the sharpest decline ever seen in such a short period of time. For Q1 2021, the earliest stage delinquencies—the 30-day and 60-day delinquencies combined—dropped to the lowest levels since the inception of the survey in 1979.

FHA-backed mortgage loans had the highest delinquency rate in Q1 2021 of all loan types, at 14.67%. The report notes that while many areas saw improvement from their mid-pandemic highs, delinquency rates as a whole are still higher than they were pre-pandemic.

What Is an Automatic Stabilizer?

Automatic stabilizers are a type of fiscal policy designed to offset fluctuations in a nation’s economic activity through their normal operation without additional, timely authorization by the government or policymakers.

The best-known automatic stabilizers are progressively graduated corporate and personal income taxes, and transfer systems such as unemployment insurance and welfare. Automatic stabilizers are called this because they act to stabilize economic cycles and are automatically triggered without additional government action.

Understanding Automatic Stabilizers

Automatic stabilizers are primarily designed to counter negative economic shocks or recessions, though they can also be intended to “cool off” an expanding economy or to combat inflation. By their normal operation, these policies take more money out of the economy as taxes during periods of rapid growth and higher incomes. They put more money back into the economy in the form of government spending or tax refunds when economic activity slows or incomes fall. This has the intended purpose of cushioning the economy from changes in the business cycle. 

Automatic stabilizers can include the use of a progressive taxation structure under which the share of income that is taken in taxes is higher when incomes are high. The amount then falls when incomes fall due to a recession, job losses, or failing investments. For example, as an individual taxpayer earns higher wages, their additional income may be subjected to higher tax rates based on the current tiered structure. If wages fall, the individual will remain in the lower tax tiers as dictated by their earned income.

Similarly, unemployment insurance transfer payments decline when the economy is in an expansionary phase since there are fewer unemployed people filing claims. Unemployment payments rise when the economy is mired in recession and unemployment is high. When a person becomes unemployed in a manner that makes them eligible for unemployment insurance, they need only file to claim the benefit. The amount of benefit offered is governed by various state and national regulations and standards, requiring no intervention by larger government entities beyond application processing.

Automatic Stabilizers and Fiscal Policy

When an economy is in a recession, automatic stabilizers may by design result in higher budget deficits. This aspect of fiscal policy is a tool of Keynesian economics that uses government spending and taxes to support aggregate demand in the economy during economic downturns.

By taking less money out of private businesses and households in taxes and giving them more in the form of payments and tax refunds, fiscal policy is supposed to encourage them to increase, or at least not decrease, their consumption and investment spending. In this case, the goal of fiscal policy is to help prevent an economic setback from deepening.

Real-World Examples of Automatic Stabilizers

Automatic stabilizers can also be used in conjunction with other forms of fiscal policy that may require specific legislative authorization. Examples of this include one-time tax cuts or refunds, government investment spending, or direct government subsidy payments to businesses or households.

Some examples of these in the United States were the 2008 one-time tax rebates under the Economic Stimulus Act and the $831 billion in federal direct subsidies, tax breaks, and infrastructure spending under the 2009 American Reinvestment and Recovery Act.

In 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act became the largest stimulus package in U.S. history. It provided over $2 trillion in government relief in the form of expanded unemployment benefits, direct payments to families and adults, loans and grants to small businesses, loans to corporate America, and billions of dollars to state and local governments.

Special Considerations

Since they almost immediately respond to changes in income and unemployment, automatic stabilizers are intended to be the first line of defense to turn mild negative economic trends around. However, governments often turn to other types of larger fiscal policy programs to address more severe or lasting recessions or to target specific regions, industries, or politically favored groups in society for extra-economic relief.