Report: The U.S. Economy Was Laden With Debt Before Covid. That’s Bad News for a Recovery. – Bestmagyou

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The coronavirus brought an end to the longest economic expansion in U.S. history. That wasn’t the only problem. When the U.S. barreled into the deep downturn that followed, it was laden with debt.

Why does this matter? Economies carrying a lot of debt generally have weaker recoveries. Businesses and consumers focus on cutting their liabilities during downturns rather than spending cash—and spending is what an economy needs to rebound.

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

Some kinds of debt matter more than others. The most important piece of a recovery is consumer spending, which accounts for nearly 70% of the U.S. economy. High household debt levels tend to lengthen recessions and amplify their severity, according to a study of advanced economies over 30 years by researchers at the International Monetary Fund.

Economic growth over the past decade—including big gains in the stock market and in U.S. home prices—has benefited wealthier households the most, while those with lower incomes fell behind. Real median household income fell after the financial crisis and didn’t surpass the inflation-adjusted 1999 record of $61,526 until 2016.

Mortgage debt, mostly held by better-paid workers, hasn’t changed much. Lower-income households, by contrast, have increased their borrowing with auto loans, student debt and credit cards. Before the pandemic, the percentage of delinquent auto-loan balances had nearly reached levels last seen in the financial crisis. Middle- and low-income consumers tend to spend more of their earnings, so high debt levels mean they will likely consume less.

Businesses have also borrowed at a record pace in recent years, leading some economists to raise alarms last year that high levels of corporate debt during a recession could force companies to slow spending and hiring to repay what they owe—or get simply overwhelmed by their repayments.

Rather than use cash to invest in their businesses, many companies bought back stock to boost share prices. Buybacks hit a record $806 billion in 2018, following the tax overhaul that lowered rates for many companies.

The quality of corporate debt suffered, with the amount of corporate triple-B rated bonds—the lowest quality investment-grade debt—more than doubling in the past decade. Companies with such ratings risk downgrades, defaults and higher borrowing costs when times get tough. So far, government stimulus and low interest rates have helped companies avoid financial struggles.

Meanwhile, state and local governments haven’t been setting aside enough to fund the increasingly expensive costs of pensions. That will compound their problems now that sales and income taxes have plummeted. Many state and local governments have already cut services and furloughed workers.

Previous recessions have set back governments’ ability to fund pensions. Some states with heavy liabilities have taken loans tied to specific streams of revenue, like sales tax, to keep borrowing costs down, which will now be even harder to pay off.

Then there’s federal debt.

Lawmakers in both political parties haven’t been too concerned with the growing federal deficit in recent years. It has ticked up every year since President Trump took office, driven by increased spending on defense, Congressionally approved programs and rising Medicare and Social Security costs. Adding to the deficit this year: $2.2 trillion in government stimulus.

The good news is that some economists and policy makers believe federal debt is less of a concern than during past recessions, thanks to low interest rates. Still, larger deficits mean greater interest payments, which have quadrupled over the past two decades, according to the Congressional Budget Office. Even after the pandemic-related spending ends, the deficit is set to keep growing to cover the rising cost of entitlements such as Social Security and major health programs.

—Graphics by John Gould

—Illustration by Jessica Kuronen

Write to Shane Shifflett at [email protected]

The post The U.S. Economy Was Laden With Debt Before Covid. That’s Bad News for a Recovery. appeared first on WSJ.

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