I agree with Barry Ritholz’s observation that it’s misleading to compare the present recovery, such as it is, with ordinary business cycle recession recoveries like that of the 1980s:
Economists who use run-of-the-mill recessions as a reference point for their analyses are implying two things: first, that there is nothing qualitatively different between debt crises and ordinary balance-sheet recessions, and second, that the usual policy measures that are effective after ordinary recessions should be similarly effective now. Both are wrong. Look no further than the results of zero interest-rate policy, which has at best a modest impact on the overall economy. It is not without effects — just see the impact on corporate profits, stock valuations and borrowing costs.
Why is there such a difference between economic recoveries? The defining characteristic of any recovery from a credit crisis is ongoing debt deleveraging, meaning that households, companies and governments are primarily using any economic gains in income or borrowing costs to reduce their debt. Low rates are not being used to buy homes, but rather to refinance existing obligations. Hence, the entire current post-crisis period has seen only mediocre retail sales gains and slow GDP growth.
However, consider the graph at the top of this post. It depicts household debt service as a percentage of personal income.
As you can see, it’s presently holding at a level lower than the typical level over the period of the last 35 years, the period for which these data are available. Debt to GDP is now below pre-recession levels, too. I would also note that the political response to the Great Recession was the same as if it had been an ordinary business cycle recession, something I pointed out at the time. Would a response more targeted to reducing household debt have resulted in a more robust recovery? We may never know.
There’s something else going on besides a “balance sheet recovery”. It’s said that the behavior of those who came of age during the Great Depression of the 1930s was colored by that experience for the rest of their lives. The same may well be true of the Great Recession of the Aughts and that doesn’t bode particularly well for future economic prosperity.
I think McBride over at Calculated Risk has shown that millennials are buying homes at very low levels. I expect that to last for quite a while.
Steve
They’ve already got mortgages around their necks thanks to useless degrees, Steve, how would they buy homes given that? Not to mention the goddamn certainty that the good jobs (except those protected for the elite such as your own august self) will either be shipped overseas or workers will be imported to replace them here?
Vote National Razor Party in 2016.
There is a lot going on in this post, but I’m not sure Ritholz’ proposition is supportable. As a first cut we have to separate terms: leverage, debt service and fixed charges, or personal consumption expenditures. And then we have taxes.
If the defining characteristic of this recovery is deleveraging of govt, corporations and consumers, then we really haven’t done it in the classic sense. Do I really need to link to government debt to GDP? It’s up 160% since the recession. Corporate debt to earnings or EBITDA has declined ( probably less than advertised due to “one time” adjustments) but has been rising for 3 years now, as the economy has slogged along at essentially zero growth. And then we have the consumer.
Household debt to disposable income has declined, but the cause is overwealmingly a decline in written off mortgage debt, not the redirection of disposable income to mortgage debt service. In fact, consumer credit has increased some 700B while mortgage debt has declined by roughly twice. The consumer has been spending. In fact, household borrowing has been increasing by about 3% per year recently.
https://www.federalreserve.gov/releases/housedebt/
Perhaps the smoking gun is the graphic in the following link. Look at personal consumption expenditures over time, even after recessions. I’ll be damned if I can attribute the post 2008 sluggishness to a lower SnapBack in PCE in this recession than in the past.
http://www.advisorperspectives.com/dshort/updates/PCE-Real-Year-over.php
So the issue still remains. Why the sluggish GDP, and just where is that consumer spending his money? I don’t know, and I’d have to find more data links. But I strongly suspect the following:
A) business investment is flat on its arse, B) the consumer is redirecting more of his income to taxes, health care expenditures, higher education expenses and an uncaptured (in the figures) housing cost, rent. Add to that the income being siphoned off to relatively well off people like equity owners and home owners, especially homeowners with most or all of their mortgages paid off, thanks to the FED and the politicians who cheer them on.
Good for government workers like teachers and school administrators, good for the medical professions, good for college workers, and good for rental property owners……..and somewhat good for the hospitality industry servicing the upper crust. Not so good for the Average Joe.
1) Average student loan debt is $37,000. It was $23,000 for the class of 2008.
2) That graph doesn’t fit with the description in the summary. It says PCE hit a high in 2009 and had a low of about 60%.
3) I mortgage debt has largely decreased because it was written off, then the deleveraging we have seen is not so much because people are paying off loans. If all they did was default, they may still feel poor.
4) Here is a question I keep meaning to look up. Does private investment come out of savings, i.e. wealth, or does some come out of current income? I suspect it comes from wealth, but don’t know for sure. What we have is the people with wealth getting wealthier w/o putting much of their money back into investments. Which leads to a second thing that is not clear here to me. I assume this is just US investments. What happens if the wealthy are investing just as much, they are just investing overseas? (I suspect part of this may be the issue created by having our economy dominated by a relatively few people of wealth. If there were more people with moderate amounts of wealth to invest I have to wonder if we wouldn’t have more real start ups.
Steve
The idea that average student debt has jumped 60% in less than eight years while wages and participation have been declining doesn’t strike you as a big deal?
Consumer debt, primarily mortgages, was written off. Simultaneously other forms of consumer debt have increased. De-leveraging occurred as measured by debt to cash flow – the numerator magically declining. But Ritholz wants to say that the de-leveraging from crisis process took cash flow otherwise available for purchases of all manner. Not true. If one looks at “fixed charges” which includes monthly payments not related to debt service, then consumers are spending. And the slope upward after the 2008’recession is similar to other recessions, even other non-recessionary periods. Further, just look at the well published consumer spending statistics. 4ish%. This is called standard of living maintenance. Must be where the other consumer debt increases come from. Certainly it’s what is propping up auto sales, with 7-10 year financing.
I’m speculating on where those other payments are directed. But it’s not a deleveraging phenomenon. I bet the items I cited are pretty darn close. It’s a narrow swath reaping the benefits.