Saturday, September 17, 2016

Ergo vigor

"Debt Service" is interest payments plus repayment of principal. So you would expect to see some similarity between household debt service and household debt. That similarity might be reduced by changes in interest rates and changes in the repayment period. But the similarity is easy to find:

Graph #1: Showing Similarity between Debt and Debt Service
The two data sets share an underlying pattern. I marked up the graph to emphasize it.

My markups of the graph are nearly continuous except in two places: at the start, because Debt Service numbers before 1980 are unavailable; and in the years before the crisis.

The gap before the crisis is much bigger for the blue than for the red; this suggests that a lag developed (or lengthened) at that point. The gap in the red contains a downward trend in the data. The gap in the blue contains a comparable downward trend followed by a pretty severe uptrend in debt service. Crisis-related? No doubt.


I couldn't resist predicting similarity at the end, where the red line rises and I expect the blue to follow.


I went over the graph and wrote down turning-point dates for the red series and corresponding dates for the blue series. For each pair I subtracted the one date from the other, and came up with a "length of lag" number. I took the lag lengths and put them on a graph:

Graph #2: Length of Lags in the Debt Service Pattern
The last two are red because we have not got to the end of those lag periods yet. My estimate of lag length is on the high side, between four and five years. One year less is plausible; two years less is not.

I plan to take this lag information and apply it to my projection of vigor in GDP. Off the top of my head, I'll say household debt begins rising just where it crosses the debt service line, in 2012 Q1 on Graph #1.

If the lag is four or five years, we should see debt service start rising some time between early 2016 and early 2017.

That increase will be the right side of the bowl shape in debt service. And remember, when we are going up the right side of that bowl, that is when we expect labor productivity to increase.

Ergo vigor.

// the Excel file

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