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Wednesday, September 16, 2015

Household Debt Service vs GDP Growth

In conversation at Art's we wondered about the relationship between household debt service payments as a percentage of disposable personal income and YoY GDP growth.  A scatterplot of the quarterly data from FRED, covering Q1, 1980 to Q1, 2015 looks like this.

Graph 1 - FRED Plot

There's a broad hint of an overall negative slope.  But if you lop off a few points on the right and the left, the remaining central cluster is relatively shapeless.   But, there does seem to be some negative slope to at least certain line segments, so that might mean something.

My first cut at figuring this out was to download the FRED data and make a new plot - Graph 2 - with line segments separated in what I hope is a coherent fashion.  I did this by eyeball, then labeled the segments according to the dates they include.   In the process I inadvertently reversed the axes, but this shouldn't change whatever conclusions might be drawn.

Graph 2 FRED data replotted as time slices

There are 10 line segments.  This is still a plate of spaghetti, but some order can be discerned.  There are some downward sloping segments, but also some straight verticals.  For clarification, I broke this into two different graphs, of five segments each.  Graph 3 has the first 5 segments spanning Q1 '80 to Q2 '91.

Graph 3 - Q1 '80 to Q2 '91  

The first two segments, blue and red, include the years 1980-4.  GDP growth varied a lot, while the debt burden hardly budged.  The up and down GDP movement reflects the double dip recession of the early 80's.  In the yellow segment, all of 1984 through the end of 1986, we see a definite downward slope.  Then the green line, through Q3 of 89, follows a similar path back, with GDP growth rising as the debt burden falls.  But then GDP growth falls dramatically until Q2 of '91while the debt burden is basically unchanged.  This, again, is a recession.

 Graph 4 shows the remaining data, through Q1 2015.

Graph 4 Q4 '91 through Q1 '15

From Q4 '91 through Q2 '93, the debt burden falls a bit and GDP growth increases a bit.  For post recession growth, this is quite week.  Debt goes back up along the dark green line from then until Q4 '98 with essentially no effect on GDP growth.  Aren't booms wonderful!  Then the bilious green line From Q4 '98 through Q1 93 shows debt burden growth for about 11 quarters with essentially no change in GDP growth, followed by the '01-02 recession.  This bottoms out in Q4 '01, then the line turns on itself and climbs back up out of the recession.  As the purple line shows, for the next 6 years the debt burden increased, while GDP growth hardly budged.  Then in mid '08, the bottom fell out of GDP growth.  Debt burden actually declined a bit through Q3 '09.  The orange line depicts the recovery and what has happened since.  The deleveraging has been epic, and the debt burden is now lower than any previous time in this record.   The recovery in GDP growth through 2010 was strong. But since then, as the debt burden continued to drop, the last five years of GP growth have been static.

I'm not quite sure what to make of this.  There are times when GDP growth correlates to the debt burden, and times when it doesn't.  Being in or out of recessions doesn't seem to be a deciding factor. And using nominal rather than inflation adjusted GDP values has expanded the Y scale in my graphs. So with inflation adjusted GDP, the downward slopes would be flatter.

In a narrative sense, falling GDP with rising debt burden makes sense.   But, at the very least, there are other factors at play.   I'm not sure I made the best data slices, and want to take another cut at this, more similar to what I did here, but that will have to wait for another time.

I also want to see what the pre 1980 data might tell us.  This entire data set was in an era of secular disinflation.

1 comment:

The Arthurian said...

"In the process I inadvertently reversed the axes ..."

I hate it when that happens :)

Evaluating ...
Graph 2: the 1980-2015 period (35 years) in 10 line segments (average length: 3½ years)

Graph 3: the 1980-1991 period (11 years) in 5 segments, average length about 2 years.
Three recessions in this period.

Yes, okay, on your Graph 3 the three recessions are quite easily identified by large changes in the vertical (GDP YoY) axis. Much more change in the GDP YoY than in the debt numbers, during these recessions.

Graph 4: the 1991-2015 period (24 years) in five segments, average length about 5 years.
Two recessions in this period.

"I'm not quite sure what to make of this."

It is hard to follow -- especially as we don't know what we're following because we're still trying to understand what the graph shows.

"I also want to see what the pre 1980 data might tell us. This entire data set was in an era of secular disinflation."

Good point. Excellent point. But at FRED, Household Debt Service Payments as a Percent of Disposable Personal Income only goes back to 1980 (grumble grumble).

I did find a PDF from 1986: Estimating Household Debt Service Payments.

And Geerussell provides the much newer How much income is used for debt payments? A new database for debt service ratios from BIS.

But it would take some serious work to generate estimates for the missing data.