The key formula: Pay back debt, reduce consumer spending

Normal recoveries, of the type we've seen regularly since World War II, are characterized by sharp and sustained snapbacks in economic growth. In the less frequent examples, where excessive debt was the cause of a recession or depression, recoveries have been far slower and weaker. 

Our massive build up in debt began in the early 1950s and culminated in the housing bubble and the near collapse, in the fall of 2008, of much of the financial system. 

In the period since, we've seen massive government bailouts and stimulus that has essentially shifted the debt from the private to the public sector. Individuals can reduce debt by not borrowing on credit cards and instead paying down their balances. They can pay down their mortgages more aggressively. They can walk away from their homes, as many have, and wipe out big chunks of debt in one swoop. 

Indeed, as Chart 1 shows, in the first few years following the real estate collapse, the nation's households have sharply reduced their debt. 

As noted earlier, history tells us different things depending on what period we look at. If we pull back and look at household debt since 1950, we get more context from this longer view, as shown in Chart 2.

Looking at the full picture of household debt since the early 1950s suggests that household debt has further to fall. Part of this drop will result from a conscious decision by households to reduce debt, and part will stem from a lesser availability of credit as financial institutions have tightened their lending standards.

Moreover, consumers' debt-fueled spending is now without its primary support - a powerfully rising housing market. Overall, as households lose their ability to fund spending with debt, we can expect to see lower spending than we saw while their balance sheets were inflating. This is an important factor since consumer spending drives about 70% of U.S. economic activity. (1)