Credit market debt helps explain slow recovery

In my Dec. 2, 2011 column, I declared that the Northern Colorado economy was growing again. The graphic that accompanied the column showed that our economy bottomed out in the summer of 2010. My Index of Economic Growth, published in the Jan. 13 issue of the Business Report showed this same bottom but also showed that the trend line bottomed at the end of 2009. Our economy has been growing for two years now.

Recent prognostications are almost unanimous that our economy will continue to grow, although at a slow to moderate pace. I’m currently in the moderate-or-greater-growth camp but check back for my quarterly update in the March 23 issue of the Business Report.

There is no doubt that the U.S. recovery will be long and slow. That is obvious by looking at the graphic here of total credit market debt as a percent of GDP. Total credit market debt includes both private and public debt. The graph goes back to 1952 but a graph going back to 1925 can be found at The ratio was about 160 in the 1920s, increased to 260 in the Great Recession and dropped to about 130 by 1952. That was the low, at least since 1920.

Credit market debt as a percent of GDP increased slowly until 1980. It took a big leap under the Reagan administration until 1987 before resuming a slower growth rate until about 1998 when it jumped again. However, President Bill Clinton balanced the federal budget in 2000. But in 2001, it really accelerated, peaking in 2009, before dropping more rapidly than at any time since about 1936.

So, let’s look at what was going on in the U.S. during these periods. The Great Depression is obvious; government debt exploded as the government stepped in and not only made up for the decrease in private debt but stopped the economic downturn and got the country moving again. Even during World War II, the ratio continued to decrease as war bond debt was overcome by wartime production. The Vietnam War does not appear to have had an effect.

During the Reagan years, the country was overcoming a major supply-side disruption as the price of energy increased from $2.90 a barrel in 1971 to $40 a barrel in the early 1980s. Energy as a percent of production costs went from 16 percent to 3 percent as industry restructured or moved abroad. At the same time, the bulge of baby boomers was in their late 30s and 40s, their most productive years and their primary “first-buyer-housing” years. The size of government also increased rapidly.

By the end of the second Clinton term, the ratio had increased to Great Depression levels as the dot-com bubble inflated.

The ratio absolutely exploded in the 2000s as the U.S. entered two wars without war bonds, the Fed made money extremely cheap after the dot-com crash, taxes were cut to their lowest levels ever and the housing market, construction sector and consumer credit expanded rapidly. By 2009, the ratio was 380, three times its level in 1952 and more than twice its level in 1980. Since 2009, the ratio has dropped about 25 points as consumer debt has contracted, overcoming the continuing increase in public debt.

It took 20 years for the ratio to fall from 260 in 1933 to 130 in 1952, a 50 percent drop. If we get a 50 percent drop from the 380 of 2009, it will be 2029. At 190, the ratio will still be 50 percent higher than it was in 1952 and 20 percent higher than it was in 1980.

We could get there more quickly; our politicians and the Fed could crash the U.S. economy or Europe could crash the world economy. That would be very painful, more painful than the Great Depression. Recovery from that might not take 20 years, but it would take at least 10 years.

So, when forecasters say the recovery will be slow and painful, believe them. At least, here in Northern Colorado, we have a competitive advantage and the pain has been and will be less severe.

How accurate are Colorado forecasters in predicting job growth in Colorado. The Colorado Bureau of Economic Research recently evaluated 2011 Colorado job forecasts by various groups in the state ( The Forum at the University of Colorado at Colorado Springs was the most accurate for 2011 with an error of 2,500 jobs (25,000 vs. 27,500 actual). Our local CSU Economics Class had an error of 8,500 jobs (19,000). Out of the 10 groups evaluated, eight were too pessimistic in late 2010.

The CBER also makes some general observations. The Colorado Legislative Council has been the most accurate forecaster since 2000, well above the second-most accurate forecaster. There is greater accuracy in forecasting employment for large sectors and service sectors. Committees are more precise when forecasting job gains than job losses and most committee forecasts tend to be conservative. Other sources, which the CBER references, suggest that as professional economists become older and more established, they produce more radical forecasts which are less accurate.
So, when deciding on whether to believe a forecast, look at the individual or group making the forecast.

John W. Green is a regional economist who compiles the Northern Colorado Business Report’s Index of Leading Economic Indicators. He can be reached at


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