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2011 Annual Report

A period of adjusting and adapting


The collective efforts of consumers, businesses, financial institutions, and governments to repair balance sheets were a major force shaping the economy's performance in 2011. The nation was experiencing something different from a typical cyclical recovery because of the length and depth of the recent recession and the severity of the financial crisis that preceded it. A broad rebalancing among various sectors of the macroeconomy such as housing and financial services was a necessary clean-up phase following the so-called "Great Recession."

Within these sectors, a similar process of adjustment and adaptation was going on, much of it entailing deleveraging. In 2009, at the end of the recession, the total domestic debt of nonfinancial components of the U.S. economy (households, nonfinancial businesses, and governments) reached 248 percent of gross domestic product (GDP). That figure was an increase of nearly 75 percentage points over the debt-to-GDP ratio a decade earlier.

Balance sheet repair occurred in four primary areas. Households focused on paying down credit card and other debt while boosting savings. Large businesses advanced significantly in strengthening balance sheets and solidifying cash reserves. Meanwhile, financial institutions continued to improve their balance sheets while also adjusting to regulatory reforms and trying to adapt their business models. Finally, governments at all levels grappled with revenue shortfalls and fiscal imbalances.

The deleveraging that was undertaken in these four areas was a necessary step toward regaining balance between assets and debts and heading toward recovery. But it also likely suppressed demand and inhibited investing and lending, which could partly explain why progress was so fitful in 2011.