Credit cardsMark Lennihan
Americans may be on a debt diet now, but the hangover from their previous credit binge is weighing on the economic recovery.
In fact, U.S. counties that racked up the most household debt during the housing boom of 2002 to 2006 are now having the toughest time rebounding from the recession.
That was the main finding of a new report published this week by the Federal Reserve Bank of San Francisco, entitled Consumers and the Economy, Part II: Household Debt and the Weak U.S. Recovery.
The report's authors, Atif Mian and Amir Sufi, argue that soaring levels of household debt in certain U.S. counties are partly to blame for the feeble recovery.
Over all, the U.S. ratio of household debt-to-disposable income was 147.2-per-cent during the third quarter of 2010.
That compared to a reading of 148.1 per cent in Canada for the same period, marking the first time in 12 years that Canadians' debt-to-income ratio exceeded that of Americans.
Still, the authors' "microeconomic analysis" of 238 counties (with populations of at least 100,000) suggest that household debt remains an "impediment" to U.S. economic growth.
In particular, household debt has affected residential investment and auto sales during the recovery. It is also playing some role in hampering job growth.
According to the report, households that took on the most debt between 2002 and 2006 are in counties where it is particularly hard to boost housing supply, such as in California and Florida. Counties with lower levels of household debt are in New York, Pennsylvania and Texas.
"The county with the largest increase in the household debt-to-income ratio from 2002 to 2006 was Monterey County, California. The county with the smallest increase was Will County, Illinois," said the report.
The authors found that high-household debt counties have generally posted the weakest auto sales and residential investment during the recovery, which is now a year-and-a-half old.
"Residential investment in high household debt counties remains 40 per cent to 60 per cent below pre-recession levels," they wrote. "In contrast, low household debt counties have almost completely avoided a decline in residential investment."
The authors concede, however, that it is harder to establish a direct correlation between household debt and employment at the county level. That is partly because the production of goods, and their eventual consumption, often occur in different places.
"However, at least part of any county's production caters to local demand .... While there is still no evidence of robust recovery in low household debt counties, the employment situation is far less bleak than in high household debt counties."
North of the border, policy makers are also busy sounding the alarm about skyrocketing household debt loads.
This week, Finance Minister Jim Flaherty announced tough new mortgage and lending rules designed to curb Canadians' seemingly ravenous appetite for credit.
Even so, data comparing household debt levels on a municipal or regional basis does not readily exist in Canada.
Craig Alexander, chief economist at TD Bank Financial Group, says he will be renewing his push for such detailed information when he meets with Bank of Canada governor Mark Carney next month.