Unexpectedly Intriguing!
December 15, 2015

Previously, we established that there is a rather strong correlation between changes in the acceleration of nominal private sector debt in the U.S. and the direction of growth for the nation's real GDP growth rate. In a nutshell, we found that "nearly 88% of periods in which the trailing twelve month average of private debt acceleration declined or was negative occurred when the U.S.' real GDP growth rate was falling", indicating that changes in the acceleration of private debt is a good predictor of the direction of GDP growth.

Why such a strong correlation between nominal private debt and real GDP? Unlike money borrowed by government entities, when people or businesses take out loans in the private sector of the economy, they do so only when they can reasonably anticipate that they will be able to generate the income or revenue needed to pay their creditors back over the terms of their loans. If they anticipate that they will have a hard time doing that going forward, they will avoid taking on debt, and vice versa - they will increase the rate of their borrowing if they anticipate having an easier time paying it back.

With the Federal Reserve having released its flow of funds data through the end of the third quarter of 2015 in the past week, we can now introduce our chart showing our calculated acceleration rate for private sector debt in the U.S. and its trailing year average against the backdrop of periods of falling GDP growth rates, recessions and the Federal Reserve's various Quantitative Easing (QE) programs in the period from Janaury 2006 through September 2015.

Acceleration (Change in Year Over Year Compounded Growth Rate) of Private Debt in the United States, January 2006 - September 2015

We see that in the third quarter of 2015, the acceleration of private debt in the U.S. remained negative, declining slightly from the previous quarter. Correspondingly, the BEA's second estimate of real GDP for the quarter indicates that its growth rate is likewise falling.

One thing to keep in mind when considering this information is that the U.S. Bureau of Economic Analysis can make significant revisions to its estimates of the nation's GDP during the first several years after it releases its initial estimates as it acquires more accurate and detailed information about the level of economic activity.

For example, the BEA's first estimate for GDP in the third quarter of 2012, released on 26 October 2012 just ahead of the last U.S. presidential elections, indicated that the real GDP growth rate for the quarter was +2.0%, up from the preceding quarter's real growth rate of +1.3%.

But now, according to Table 1 of the BEA's second estimate of GDP for the third quarter of 2015, which was released on 24 November 2015, we find that the real GDP growth rate of 2012-Q3 is now estimate to be just +0.5%, having fallen from the preceding quarter's real growth rate of +1.9%, as the economy of the U.S. was actually in the process of stalling out at that time. Only the U.S. Federal Reserve's expected intervention through its third Quantitative Easing program (QE 3.0), and its boosting effect on private debt, prevented the U.S. economy from fully sinking into recession at that time.

It will be interesting to see how the acceleration of private debt in the U.S. evolves should the Federal Reserve finally follow through on its plans to start hiking short term interest rates in the U.S. in the absence of any additional quantitative easing programs later this week.

Data Sources

U.S. Federal Reserve. Data Download Program. Z.1 Statistical Release (Total Liabilities for All Sectors, Rest of the World, State and Local Governments Excluding Employee Retirement Funds, Federal Government). 1951Q4 - 2015Q3. [Excel Spreadsheet]. Online Database. 10 December 2015. Accessed 14 December 2015.

U.S. Bureau of Economic Analysis. Table 1.1.1. Percent Change from Preceding Period in Real Gross Domestic Product.
1947Q1 through 2015Q3 (second estimate). Online Database]. Accessed 14 December 2015.


National Bureau of Economic Research. U.S. Business Cycle Expansions and Contractions. [PDF Document]. Accessed 14 December 2015.

da Costa, Polyana and Ponder, Crissinda. How Fed Moves Affect Mortgage Rates. (Timeline for Federal Reserve Quantitative Easing Programs QE 1.0 through 3.0). [Online Article]. 17 September 2015. Accessed 14 December 2015.

Previously on Political Calculations

Political Calculations. The Position, Velocity and Accelration of Private Debt in the U.S.. 5 November 2015.

Political Calculations. The Correlation Between Decelerating Debt and Falling GDP. 12 November 2015.

Political Calculations. QE and the Acceleration of Private Debt in the U.S.. 18 November 2015.

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