Does Household Debt Contribute to Unemployment? That’s the argument of Professors Amir Sufi and Atif Mian who claim that weakness in household balance sheets and the associated pullback in spending are directly responsible for 65 percent of the U.S. job losses from 2007 to 2009.
Using county level retail sales data, they attempt to show that the large accumulation of household debt prior to the recession in combination with the decline in house prices has been the primary explanation for the onset, severity, and length of the subsequent consumption collapse. They argue that the decline in consumption was much stronger in high leverage counties with large house price declines and is directly linked to high levels of unemployment in the U.S.
The author’s findings, which they detailed in Bloomberg this week, has generated a lot of discussion (see Calculated Risk) including a posting of the author’s summary presentation at Business Insider.
Here’s where I think they missed the boat.
The "accumulation" of debt was not the trigger or key factor in the slowdown. It was the lack of access to debt that contributed to the consumption collapse.
Easy access to debt kept the economy going from 2002-2006. In 2007, access to debt became more and more restrictive which led to a steady decline in consumer credit card balances.
Card-issuing banks tried to rein in risk amid rising delinquencies and charge-offs and before new legislation and regulations were implemented.
US consumers did not become frugal, they no longer had access to easy debt. Both consumers and small business owners with stellar credit scores felt the sting of reduced credit limits and closed accounts.
Starting this past summer, new credit card account originations began to rise and U.S. consumer revolving credit rose indicating that the sustained pullback in consumer lending has started to ease.
Since personal income in the US remains stagnant, much of the economic growth that we have seen over the past few quarters is probably the result of the increased availability/utilization of consumer credit. While this can fuel a strong third and fourth quarter of 2011, I would expect a slow start to 2012 when credit card statements begin to hit consumer’s mail boxes or email.