Amir Sufi and Atif Mian describe at Barron’s their research into links between household debt and economic busts.

[T]he Great Recession showed us we can predict a slowdown in economic activity by looking at rising household debt. In the U.S. and across many other countries, changes in household debt-to-GDP (gross domestic product) ratios between 2002 and 2007 correlate strongly with increases in unemployment from 2007 to 2010. For example, before the crash, household debt had increased enormously in Arizona and Nevada, as well as in Ireland and Spain; after the crash, all four locales had particularly severe recessions.

In fact, rising household debt was predictive of economic slumps long before the Great Recession. In his 1994 presidential address to the European Economic Association, Mervyn King, then the chief economist at the Bank of England, showed that countries with the largest increases in household debt-to-income ratios from 1984 to 1988 suffered the largest shortfalls in real (inflation adjusted) GDP growth from 1989 to 1992.

In our own work with Emil Verner of Princeton University, we have shown that U.S. states with larger household-debt increases from 1982 to 1989 had larger increases in unemployment and more severe declines in real GDP growth from 1989 to 1992. In another study with Verner, we examined data from 30 countries over the past 40 years, and showed that rising household debt-to-GDP ratios have resulted in slower GDP growth and higher unemployment. Recent research by the International Monetary Fund, which used an even larger sample, confirms this result.

The conclusion we draw from a large body of research into the links between household debt, the housing market, and business cycles is that expansions in credit supply, operating primarily through household demand, are an important driver of business cycles generally.