Can Measures of the Consumer Debt Burden Reliably Predict An Economic Slowdown?

Some analysts and business executives are becoming concerned that recent increases in the consumer debt burden, defined as the level of consumer debt relative to ability to repay, may foreshadow an economic slowdown. Higher debt increases the risk that a household may experience financial distress in the event of an adverse economic shock, such as the loss of a job or large uninsured medical expenses. As the risk of financial distress rises, households may become less willing to spend on consumer goods, particularly big ticket items such as automobiles and home computers. Reduced consumer spending in turn would hurt economic growth as firms cut back on the production of consumer goods and laid off workers.