by Calculated Risk on 11/16/2011 08:39:00 PM
Wednesday, November 16, 2011
Professors Amir Sufi and Atif Mian use county level data to show that household balance sheet problems are directly linked to the high level of unemployment. It is important for policy to understand the reasons unemployment has remained elevated.
From Bloomberg: How Household Debt Contributes to Unemployment: Mian and Sufi
The weakness in household balance sheets and the associated pullback in spending are directly responsible for the lion’s share of employment losses in the U.S. economy. This deficiency remains the most significant impediment to a robust recovery.A summary and two papers:
Our research suggests that 65 percent of the job losses from 2007 to 2009 came from the drop in household spending induced by the collapse in home prices and its effect on a highly levered household sector.
The declines in consumption are far too large to be explained by the drop in house prices alone. It was the combination of collapsing home values and high debt levels that proved disastrous. High-debt areas have been plagued with delinquencies, deleveraging, and the inability to refinance into lower rates -- all characteristics of overleveraged households.
Further, low levels of consumption in high-debt areas continue to be a major drag. For instance, in the second quarter of 2011, auto sales in U.S. counties with the most debt remained a whopping 40 percent below their 2006 levels. By contrast, in areas that had healthy balance sheets before the recession began, the declines in spending were short-lived and a robust recovery is under way.
Household Balance Sheets and the Weak Recovery
What Explains High Unemployment? The Aggregate Demand Channel
A drop in aggregate demand driven by shocks to household balance sheets is responsible for a large fraction of the decline in U.S. employment from 2007 to 2009. The aggregate demand channel for unemployment predicts that employment losses in the non-tradable sector are higher in high leverage U.S. counties that were most severely impacted by the balance sheet shock, while losses in the tradable sector are distributed uniformly across all counties. We find exactly this pattern from 2007 to 2009. Alternative hypotheses for job losses based on uncertainty shocks or structural unemployment related to construction do not explain our results.Household Balance Sheets, Consumption, and the Economic Slump
The large accumulation of household debt prior to the recession in combination with the decline in house prices has been the primary explanation for the onset, severity, and length of the subsequent consumption collapse. Using novel county level retail sales data, we show that the decline in consumption was much stronger in high leverage counties with large house price declines.Earlier:
• Industrial Production increased 0.7% in October, Capacity Utilization increased
• Residential Remodeling Index at new high in September
• AIA: Architecture Billings Index increased in October
• Rate of increase slows for Key Measures of Inflation in October
• NAHB Builder Confidence index increases in November