Has US household deleveraging ended? A model-based estimate of equilibrium debt
Bruno Albuquerque, Ursel Baumann, Georgi Krustev 18 April 2014
Household deleveraging in the US has impeded consumption and market activity in recent years, holding back the recovery. Despite substantial progress in balance sheet repair, a key question is whether deleveraging has ended or whether further adjustment is needed. This column presents time-varying equilibrium estimates of the household debt-to-income ratio determined by economic fundamentals. Taking into account the latest available data, the estimates suggest that the household deleveraging process may have ended at the end of 2013.
The balance sheet adjustment in the household sector has been a prominent feature of the last US recession and subsequent recovery. The beginning of the economic downturn in late 2007 broadly coincided with a sustained reduction in household liabilities relative to income – that is, household deleveraging – which contrasted with the strong build-up of debt before the crisis. From a peak of around 129% in the fourth quarter of 2007, the household debt-to-income ratio fell by 26 percentage points to around 104% in the fourth quarter of 2013, led by sustained declines in mortgage debt.
Great Recession, household debt, household deleveraging