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Wednesday, January 18, 2006

Household Debt Payments and Unemployment

Here is a graph of household debt service payments as a percent of disposable personal income from 1980Q1-2005Q3, the latest period for which consistent data exist (total financial obligations show a similar pattern):

I wanted to see how the debt load related to economic downturns, so the shaded areas are NBER dated recessions. It's hard to see a strong association between the recessions and changes in debt. The next graph plots the same series along with the negative of the unemployment rate. The association appears much stronger:

To see if regression confirms the association, I ran OLS on

          %Debtt = β0 + β1%Debtt-1 + β2%Debtt-2 + β3UNt + et

and it does (debt data described here). The coefficient on UN is significant at the 5% level:

     Linear Regression - Estimation by Least Squares
     Dep Var PERCENTDEBT
     Quarterly Data:  1980:03 To 2005:03
     Usable Observations             101
     Degrees of Freedom               97
     Durbin-Watson Statistic    2.014351

     Variable        Coeff          T-Stat     Signif
     ***************************************************
        β0        0.468304856      1.49629   0.13782438
        β1        1.125298228     11.06370   0.00000000
        β2       -0.150035410     -1.48249   0.14145135
        β3       -0.024721984     -2.01484   0.04668936

As you interpret the second graph, remember that it's the negative of the unemployment rate. Thus, when the blue line is rising, unemployment is falling. In the regression results the actual unemployment rate, not the negative of it, is used. This is a fairly broad brush and it may hide detail such as differences by income class, and omitted variables are a concern, but in general these data and this model suggest unemployment and the debt percentage are negatively related.

    Posted by on Wednesday, January 18, 2006 at 12:01 AM in Economics, Unemployment | Permalink  TrackBack (0)  Comments (9)

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