Working Paper: NBER ID: w15896
Authors: Atif R. Mian; Amir Sufi
Abstract: We show that household leverage as of 2006 is a powerful statistical predictor of the severity of the 2007 to 2009 recession across U.S. counties. Counties in the U.S. that experienced a large increase in household leverage from 2002 to 2006 showed a sharp relative decline in durable consumption starting in the third quarter of 2006 - a full year before the official beginning of the recession in the fourth quarter of 2007. Similarly, counties with the highest reliance on credit card borrowing reduced durable consumption by significantly more following the financial crisis of the fall of 2008. Overall, our statistical model shows that household leverage growth and dependence on credit card borrowing as of 2006 explain a large fraction of the overall consumer default, house price, unemployment, residential investment, and durable consumption patterns during the recession. Our findings suggest that a focus on household finance may help elucidate the sources macroeconomic fluctuations.
Keywords: household leverage; recession; macroeconomic fluctuations; consumer credit; durable consumption
JEL Codes: E2; E3; G01; R2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Household leverage (G51) | Durable consumption (E21) |
| Household leverage (G51) | Household default rates (G59) |
| Household leverage (G51) | House prices (R31) |
| Household leverage (G51) | Unemployment (J64) |
| Credit card borrowing (G51) | Household defaults (D19) |
| Credit card utilization rates (G51) | Auto sales (L81) |
| Credit card utilization rates (G51) | Unemployment (J64) |
| Household leverage growth (G51) | Economic downturn severity (F44) |