Elizabeth Warren's recession scare appears long on fear, short on facts
- Sen. Elizabeth Warren is sounding the alarm over a potential crisis ahead, citing a manufacturing "recession" and dangerous debt levels.
- However, the Democratic presidential candidate's analysis skips some important context about both issues.
- Debt levels appear manageable, at least for now, while there's scant evidence of a manufacturing recession.
Democratic presidential candidate Elizabeth Warren's warning about an impending economic crisis carried with it some level of hyperbole.
Specifically, the Massachusetts senator's alarm-sounding about consumer debt neglects to measure it against the growth in the economy and the ability to pay.
And she flatly states, in an essay for Medium, that "the country is now in a manufacturing recession" even though there is scant evidence of that being the case.
On the debt issue, Warren is correct in pointing out that aggregate levels have increased. Nonhousing debt has jumped from $2.63 trillion in mid-2009 as the last recession was ending to $4.02 trillion as of the end of the first quarter of 2019, an increase of 52.8%, according to New York Federal Reserve data.
More importantly, though, consumers' ability to pay has increased at a pace well above the aggregate debt totals.
Household net worth currently stands at $108.6 trillion, more than double the $50.4 trillion where it was in June 2009, according to the Fed. At the same time, total household debt is $15.7 trillion, or about 14.4% of total net worth. In June 2009, the total household debt was $13.8 trillion, or 27.4% of total net worth or just shy of double in percentage terms.
Measured relative to GDP, household debt is below 80%, compared with nearly 100% at the crisis peak. As a percent of disposable income, debt now is around 9.9%, compared with 13.2% in the late-2007 peak.
Americans are doing much better at paying their debts as well.
The charge-off and delinquency rate for all loans and leases was 1.53% in the first quarter, tied for the lowest since the second quarter of 2006, Fed data shows. True, credit card delinquencies have been inching higher, to 2.59%, the highest level since Q1 of 2013, but the rate is still well below the financial crisis peak of 6.77% in Q2 of 2009.
To be sure, all is far from rosy in the debt picture.
Student loan debt has surged to just shy of $1.6 trillion, or more than double where it was in mid-2009, and some 9.54% of borrowers were in serious delinquency — 90 days or more late — in the first quarter, compared with 9.08% a year ago. Auto debt is at $1.28 trillion, around a record, with 2.36% of all borrowers in serious delinquency, according to the New York Fed.
Corporate debt is another issue.
Total nonfinancial corporate debt is around $6.4 trillion, or 73% higher since the end of the recession. Economists have become concerned with the poor credit quality among borrowers who have taken advantage of low rates to run up growing levels of leverage.
However, default rates have remained low; commercial and industrial loans, for instance, had a default rate of just 1.14% in the first quarter, about in line with recent levels and well below the financial crisis peak of 4.35%. Still, Fed officials have expressed concern with the rising corporate debt levels, particularly in the securitization space where debt is bundled into the kinds of exotic financial instruments that helped spark the financial crisis.
Then there's the national debt — $22 trillion and counting, and expected to exceed GDP in the years ahead. However, none of the current budget proposals on Capitol Hill, either from the administration or Congress, do anything to address the public IOU.
The manufacturing question
On the manufacturing issue, the case for a recession is far from clear-cut.
Warren links to a Marketwatch article that calls a manufacturing recession because the sector posted declines in consecutive quarters, according to Fed data released earlier this month. But that's a suspect reading of the actual numbers that have been coming in.
The Fed's industrial production data showed a decline of 1.2% from the previous quarter. However, production was still up 1.3% year over year, and other more closely watched indicators of manufacturing indicate expansion, albeit slowing.
For instance, the Institute for Supply Management's PMI reading was 51.7% for June, which was a 0.4 percentage point decline from the previous month but still in expansion territory above 50%. Other regional manufacturing surveys also showed growth.
The Philadelphia Fed manufacturing index bounced back sharply in June to 21.8, representing the percentage of businesses reporting growth against those seeing declines, while the New York Fed also rose well above expectations to 4.3, a 13-point jump from the previous month.
Warren said she sees "a number of serious shocks on the horizon that could cause our economy's shaky foundation to crumble," and she's not necessarily alone in that regard. Morgan Stanley economists said they see a "credible" case for recession on the horizon, and the New York Fed's own gauge is at a recovery high.
But in terms of imminent danger, debt levels appear manageable and manufacturing is still positive — at least for now.