The state of U.S. consumers’ finances will not prevent a recovery in North America or lead it into a double-dip recession, according to RBC Financial Group economists in a report released today, U.S. Household Finances: Stuck in a Debt Trap, or Recharging for a Recovery?

“There’s widespread worry that U.S. consumers — who account for two thirds of economic activity and are the lifeblood of the economy — are so mired in debt that they can’t keep up the spending with repercussions for the strength and sustainability of recovery not only in the U.S. but in Canada,” said the report’s author, Derek Holt, RBC’s assistant chief economist. “If U.S. consumers are flat on their backs then the outlook for Canadian exporters and consumers is bleak.”

But, according to Holt, pessimists on household finances are focused on flawed measures and are too quick to draw parallels to early 1990s conditions when many more things were going horribly wrong in the economy. “U.S. household finances are far better off than the most alarmist depictions and are improving rapidly.”

The report argues that the bellwether gauge for measuring household health is the debt-service burden, which adds up interest and principal payments on debt as a percentage of after-tax income, and is highly correlated to bankruptcy liabilities and spending. Its expected improvement bodes well for consumer health starting towards year-end. “Much of the fixation on household indebtedness in the U.S. is upon the ratio of outstanding debt to after-tax personal income, but this measure means little,” said the report.

The report indicates that a key positive for the American consumer is the recovery of half the wealth lost in equity markets over the previous two years. Equities have snapped back, coupled with the strong real estate gains that offset most of the remaining lost equity wealth. Many of these factors reflect the dissipating influences of September 11th, and the positives are concentrated upon the vast majority of households. The resulting freed-up income from the positive influences should allow for increased consumer spending and a modest increase in the personal savings rate, ” said the RBC report.