Household leverage and the recession of 2007-09

This paper shows that household leverage as of 2006 is a powerful statistical predictor of the severity of the 2007-09 recession across U.S. counties. Those counties 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 2006a 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, the 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. The findings suggest that a focus on household finance may help elucidate the sources of macroeconomic fluctuations.