The US economy was in debt before Covid. This is bad news for a recovery.

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The coronavirus ended the longest economic expansion in U.S. history. It wasn’t the only problem. When the United States entered the deep recession that followed, it was loaded with debt.

Why is this important? Heavily indebted economies tend to have lower recoveries. Businesses and consumers are focused on reducing their liabilities during downturns rather than spending cash – and spending is what an economy needs to rebound.

In total, borrowing spurred by years of low interest rates amounts to $ 64 trillion in consumer, business and government debt. How much does it cost? That’s more than triple the country’s gross domestic product. The series of charts below illustrate how we got here and what that means for any recovery.

Growth in public debt, corporations *, households and unfunded pension obligations

Growth in public debt, corporations *, households and unfunded pension obligations

Growth in public debt, corporate *, household and unfunded pension obligations

Growth in public debt, corporations *, households and unfunded pension obligations

State and local government

Households and non-profit organizations

State and local government

Households and non-profit organizations

State and local government

Households and non-profit organizations

State and local government

Some types of debt matter more than others. The most important element of a recovery is consumer spending, which accounts for nearly 70% of the US economy. High levels of household debt tend to prolong recessions and amplify their severity, according to a 30-year study of advanced economies by researchers at the International Monetary Fund.

Economic growth over the past decade – including significant gains in the US stock market and house prices – has benefited the wealthiest households the most, while those with lower incomes have lagged behind. Median real household income fell after the financial crisis and did not exceed the 1999 inflation-adjusted high of $ 61,526 until 2016.

Real household expenditure during recessions preceded by …

Median income, 2019 dollars

High household debt ratio

YEARS SINCE THE START OF THE RECESSION

Real household expenditure during recessions preceded by …

Median income, 2019 dollars

High household debt ratio

YEARS SINCE THE START OF THE RECESSION

Median income, 2019 dollars

Real household expenditure during recessions preceded by …

High household debt ratio

YEARS SINCE THE START OF THE RECESSION

Real household expenditure during recessions preceded by …

High household debt ratio

YEARS SINCE THE START OF THE RECESSION

Median income, 2019 dollars

Mortgage debt, mostly held by better-paid workers, hasn’t changed much. Low-income households, on the other hand, increased their borrowing through auto loans, student debt and credit cards. Prior to the pandemic, the percentage of overdue auto loan balances had almost reached levels last seen during the financial crisis. Middle and low income consumers tend to spend more of their income, so high debt levels mean they are likely to consume less.

Consumer debt levels excluding housing

Percentage of loan balances over 90 days past due by loan type

Growth in consumer debt by type

Percentage of loan balances over 90 days past due by loan type

Growth in consumer debt by type

Percentage of loan balances over 90 days past due by loan type

Growth in consumer debt by type

Growth in consumer debt by type

Percentage of loan balances over 90 days past due by loan type

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Businesses have also borrowed at an all-time high in recent years, leading some economists to sound the alarm last year that high levels of corporate debt during a recession could force companies to slow down. expenses and hire to pay back what they owe – or just be overwhelmed with their repayments. .

Rather than using cash to invest in their businesses, many companies have repurchased stocks to increase stock prices. Buyouts hit a record $ 806 billion in 2018, following the tax overhaul that lowered rates for many companies.

The quality of corporate debt has suffered, as the number of triple-B-rated corporate bonds – the lowest investment grade debt – more than doubled in the past decade. Companies with such ratings risk downgrading, defaulting and higher borrowing costs when times get tough. So far, government stimulus and low interest rates have helped businesses avoid financial hardship.

Share buybacks in S&P 500 companies

Issuance of corporate bonds rated triple B

Share buybacks in S&P 500 companies

Issuance of corporate bonds rated triple B

Share buybacks in S&P 500 companies

Issuance of corporate bonds rated triple B

Share buybacks in S&P 500 companies

Issuance of corporate bonds rated triple B

Corporate debt * by rating category, in trillions

Corporate debt * by rating category, in trillions

Corporate debt * by rating category, in trillions

Corporate debt * by rating category,
in trillions

Meanwhile, state and local governments haven’t set aside enough to fund the rising costs of pensions. It will make their problems worse now that sales and income taxes have fallen. Many states and local governments have already cut services and laid off workers.

Previous recessions have reduced the ability of governments to finance pensions. Some states with heavy responsibilities have taken out loans tied to specific income streams, such as sales tax, to reduce borrowing costs, which will now be even more difficult to repay.

Percentage of public and local government pension commitments funded

Issuance of municipal bonds backed by sales tax

Percentage of state and local government pension commitments funded

Issuance of municipal bonds backed by sales tax

Percentage of public and local government pension commitments funded

Issuance of municipal bonds backed by sales tax

Percentage of state and local government pension commitments funded

Issuance of municipal bonds backed by sales tax

Then there is the federal debt.

Lawmakers from both political parties have not been overly concerned about the growing federal deficit in recent years. It has increased every year since President Trump took office, due to increased defense spending, programs approved by Congress, and rising Medicare and Social Security costs. Added to the deficit this year: $ 2.2 trillion in government stimulus.

The good news is that some economists and policymakers believe federal debt is less of a concern than in past recessions, thanks to low interest rates. Still, larger deficits mean larger interest payments, which have quadrupled over the past two decades, according to the Congressional Budget Office. Even after pandemic-related spending ends, the deficit is expected to continue to rise to cover the rising cost of entitlements such as social security and major health programs.

Write to Shane Shifflett at [email protected]

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