The U.S. Economy Was Laden With Debt Before Covid. That’s Bad News for a Recovery. – The Wall Street Journal

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.

Growth of government, business*, household debt and unfunded pension obligations

U.S. debt to GDP†

RECESSION

RECESSION

Growth of government, business*, household debt and unfunded pension obligations

U.S. debt to GDP†

RECESSION

RECESSION

Growth of government, business*, household debt and unfunded pension obligations

U.S. debt to GDP†

RECESSION

RECESSION

Growth of government, business*, household debt and unfunded pension obligations

RECESSION

U.S. debt to GDP†

RECESSION

Debt growth by sector

Federal government

State and local government‡

Nonfinancial business

Households and nonprofit organizations

Debt growth by sector

Federal government

State and local government‡

Nonfinancial business

Households and nonprofit organizations

Debt growth by sector

Federal government

State and local government‡

Nonfinancial business

Households and nonprofit organizations

Debt growth by sector

Federal government

State and local government‡

Nonfinancial business

Households and

nonprofit organizations

*Nonfinancial    †Includes federal, state and local government, nonfinancial business, household and nonprofit debt and unfunded pension obligations     ‡Including unfunded pension obligations      
Source: Federal Reserve

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.

Real household spending during recessions preceded by…

Median income, 2019 dollars

thousand

RECESSION

High household debt-to-income ratio

YEARS SINCE RECESSION BEGAN

Real household spending during recessions preceded by…

Median income, 2019 dollars

thousand

RECESSION

High household debt-to-income ratio

YEARS SINCE RECESSION BEGAN

Median income, 2019 dollars

Real household spending during recessions preceded by…

thousand

RECESSION

High household debt-to-income ratio

YEARS SINCE RECESSION BEGAN

Real household spending during recessions preceded by…

High household debt-to-income ratio

YEARS SINCE RECESSION BEGAN

Median income, 2019 dollars

thousand

RECESSION

Sources: International Monetary Fund (spending); U.S. Census Bureau (income)

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.

Consumer nonhousing debt levels

 trillion

Student loan

Credit card

Auto loan

 trillion

Student loan

Credit card

Auto loan

 trillion

Student loan

Credit card

Auto loan

 trillion

Student loan

Credit card

Auto loan

Percentage of loan balances 90+ days past due by loan type

Growth in consumer debt by type

Credit card

Nonhousing debt

Student loan

Housing debt

Percentage of loan balances 90+ days past due by loan type

Growth in consumer debt by type

Credit card

Nonhousing debt

Student loan

Housing debt

Percentage of loan balances 90+ days past due by loan type

Growth in consumer debt by type

Credit card

Nonhousing debt

Student loan

Housing debt

Growth in consumer debt by type

Nonhousing debt

Housing debt

Percentage of loan balances 90+ days past due by loan type

Credit card

Student loan

Source: New York Federal Reserve’s Consumer Credit Panel

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.

Corporate debt* by rating category, in trillions

$0.071

$0.355

$1.216

$1.193

$1.600

CCC/below

$0.322

$2.977

Corporate debt* by rating category, in trillions

$0.071

$0.355

$1.216

$1.193

$1.600

CCC/below

$0.322

$2.977

Corporate debt* by rating category, in trillions

$0.071

$0.355

$1.216

$1.193

$1.600

CCC/below

$0.322

$2.977

Corporate debt* by rating category,

in trillions

$0.071

$0.355

$1.600

$1.216

$2.977

CCC/below

$1.193

$0.322

*Includes bonds, loans, and revolving credit facilities that are rated by S&P Global Ratings from financial and nonfinancial issuers. Data as of April 1, 2020

Sources: S&P Dow Jones Indices (buybacks); S&P Global Ratings Research (bonds, debt)

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.

Federal deficit

trillion

FY2001

Federal deficit

trillion

FY2001

Federal deficit

trillion

FY2001

Federal deficit

trillion

FY2001

Note: FY2020 based on Congressional Budget Office projections. Fiscal year ends Sept. 30.

Sources: U.S. Office of Management and Budget; Congressional Budget Office

—Graphics by John Gould

—Illustration by Jessica Kuronen

Write to Shane Shifflett at Shane.Shifflett@wsj.com