Introduction: Research by the Federal Reserve Board economists shows that this recession is indeed different--households are under particular financial stress because of this economic downturn. Consumer spending and residential investment have dropped far faster and more dramatically in the 2007-2008 recession than in previous ones. Importantly, there is significantly more debt on household balance sheets after this recession.
An excerpt from the report: The downturn in economic activity in the U.S. since December 2007 has been noticeably deeper and has already lasted considerably longer than the prior two recessions—those beginning in July 1990 and in March 2001. In addition, a key difference between the current and the past two recessions is the extent to which declines in consumer spending and residential investment contributed to the drop in aggregate demand since late 2007—that is, the extent to which the current episode has, thus far, been more of a “consumer-led” than a “business-led” recession.
This paper uses household-level data from the Federal Reserve Board’s series of Surveys of Consumer Finances (SCFs) to document three specific factors that appear to have contributed to greater financial stress in the household sector in the current downturn compared with the prior two: 1) substantial and widespread reductions in home values that resulted in sizable erosions of home equity and net worth for many homeowners; 2) markedly expanded holdings of corporate equity among middle-income households which lost significant value, on net, as stock prices sunk; and, 3) greater debt on household balance sheets, and overall financial vulnerability, around the onset of the 2008-09 recession, particularly for those in the middle part of the income and wealth distributions. These latter developments appear to have left many households without significant financial buffers and, therefore, particularly vulnerable to drops in assets values and to job losses.
Read the full report here.