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Thursday, March 31, 2005

Buying GDP Growth with Debt

by Calculated Risk on 3/31/2005 12:43:00 AM

The final fourth quarter GDP numbers were released by the Commerce Department. The headline number was 3.8% annualized GDP growth in the 4th quarter of 2004. That is solid growth and about average for the last 10 years.

However, the growth in the National Debt and household mortgage debt in the 4th quarter, as a percentage of GDP, is the untold story. Here are the numbers for the 4th quarter, 2004:

GDP: $2.999 Trillion ($11.994 Trillion annual rate)
Increase in National Debt: $217 Billion (US Treasury)
Increase in Mortgage Debt: $205 Billion (Federal Reserve: Flow of Funds)

The increase in National and household mortgage debt as % of GDP: 14.1%

This continues a trend over the last four years as depicted in this chart. It appears that we are buying GDP growth with debt. If I was analyzing a company's balance sheet, and I saw this trend, I would be very concerned.

And the 4th quarter was even worse. The increase in debt was 14.1% of GDP.

With all that additional debt, maybe we should be asking why GDP growth was so low!