Economist's Corner – Deleveraging and Shifting Leverage in the U.S. Economy


 The latest numbers on debt in the U.S. economy reveal some important changes.  Households continued to pare their debt burdens for the fifth consecutive quarter in the July-September period, with reductions in both mortgage debt and consumer credit.  Non-financial businesses also reduced their leverage for the second quarter in a row.  In contrast, debt at the state and local levels continued to expand moderately, while federal debt soared.

The total amount of debt in the U.S. economy is now growing at about only a third of the pace experienced in the 2004-2007 period because of the decline in private sector borrowing.  Last quarter, total non-financial debt rose at an annualized pace of 2.8% versus the 9.0% average in the four boom years before the recession struck in 2008.

While the deleveraging of the private sector represents a constructive trend, the expansion of leverage at the government level is disturbing, with the explosion at the federal level a particular concern.  Last year and this year’s expected growth in federal debt is likely to average close to 25%, the fastest two-year growth in the post World War II history.

Leading economists in the latest two surveys of the National Association for Business Economics have cited the federal debt as their biggest concern over the next five years.  As the economy starts to regain its footing, it is imperative that policymakers make the health of government finances a major priority in 2010.

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