Household Balance Sheets and the Weak Recovery

[FarCenter]

Based on a comparison of counties which had a high consumer debt to income ratio (e.g. in CA) with counties which had a low consumer debt to income ratio (e.g. TX). A high ratio explains much of the ensuing lack of recovery in consumption in those counties as consumers deleverage.

http://faculty.chicagobooth.edu/amir.sufi/MianSufi_summary_Nov2011_public.pdf

Bottom Line
• High levels of household debt led to sharp pull-back in consumption when house prices collapsed
• Geographic variation in consumption and non-tradable employment suggest a large fraction of declines can be explained by this channel
• Persistence in these effects explains weak recovery
• Happy to entertain other theories, but the across-county evidence is a severe restriction on other hypotheses