From Neil Irwin at the WaPo: Economic data don’t point to boom times just yet
“There have always been Wall Street economists wanting to cheerlead the recovery, and quick to jump on any piece of news showing a great boom is around the corner,” said Kenneth Rogoff, a Harvard economist. “The data so far are more consistent with a very moderate recovery.”
There are a number of reasons that would be the case. American households are trying to reduce debt to stabilise finances. But they are doing so slowly, with total household debt at 94 per cent of gross domestic product in the fourth quarter down just slightly from 96 per cent when the recession began in late 2007…
“When you have a recession that’s amplified by a deep financial crisis, the recovery is slower and more painful, much akin to recovering from a heart attack,” said Rogoff … “It just takes time. If you look at a typical recovery, we would be growing at 7 or 8 per cent by now given the depth of our fall.”
Click on graph for larger image.
This graph, based on the Federal Reserve Flow of Funds data, shows household debt as a per cent of GDP through Q4 2009 (note: I removed a few non-profit categories).
Note that the household debt problem is mostly a mortgage debt problem. Mortgage debt as a per cent of GDP started really picking up in 2001 and 2002 and continued to increase sharply through 2006.
There was also a sharp increase in mortgage debt in the late ’80s. That was partially associated with Tax Reform Act of 1986 that only allowed mortgage debt to be tax deductible, and excluded interest on all personal loans including credit card debt. There was also a smaller housing bubble in the late ’80s that was associated with the increase in mortgage debt.
The second graph shows the annual change in the per cent of household mortgage debt.
There was some increase in the late ’90s associated with the booming economy and stock bubble wealth effect. But the real boom in mortgage debt started in the 2nd half of 2001 – and continued through 2006. This rapid increase in mortgage debt should have been a red flag for regulators.
Finally, on Rogoff’s comment about “Wall Street economists wanting to cheerlead the recovery”, there is an old saying on Wall Street for analysts: Bearish equals unemployed. Of course they are cheerleading!
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