Consumers and the economy, part II: Household debt and the weak U.S. recovery

Abstract

The U.S. economic recovery has been weak, especially in employment growth. A microeconomic analysis of U.S. counties shows that this weakness is closely related to elevated levels of household debt accumulated during the housing boom. Counties where household debt grew moderately from 2002 to 2006 have seen a moderation of employment losses and a robust recovery in durable consumption and residential investment. By contrast, counties that experienced large increases in household debt during the boom have been mired in a severe recessionary environment even after the official end of the recession. One of the striking features of the U.S. economic downturn that started in 2007 is that it was preceded by the largest increase in household debt in recent history. The thin blue line in Figure 1 plots the ratio of household debt to income for the U.S. economy over time, where income is measured as compensation and wages. After a steady increase from 1950 to 2001, the household debt-to-income ratio skyrocketed

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