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ISDS 513
Course: ISDS 513
From the above figure, the median household income positively affects debt payment. The more
the income consumer earns, the more debt payment they will be paying. The R-square with 75%
shows that the relationship is strong. Consumers take loans for various purposes like buying
houses, vehicles, education, and vacations based on their Income, which affords the debt
payment. If the consumers have meager incomes, they do not even consider taking a loan.
Figure 2: simple linear regression between Average household debt vs. Median household income
As the P-value of Income is less than alpha (9.66E-09<0.1), the relationship between debt
payment and Income is significant.
2. Debt payments and the unemployment rate
The above figure indicates that the unemployment rate hurts debt payment in correlation with a
higher unemployment rate means lower debt/loan taken by the consumers. The R-Square: 20%
indicates the relationship is not strong. In terms of the economic situation, consumers tend to
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Statistical Analysis Report
ISDS 513
take more loans to support their living expenses and support their families when they do not have
jobs. The P-value of Income is less than alpha (0.01933<0.1), indicating the relationship between
Debt payment vs. Unemployment rate is significant. Nevertheless, in the real world, consumers
will take more loans when unemployed.
We need to consider many factors that influence Debt payment by consumers. To answer that
question, We need to conduct a multi-linear regression analysis by considering Debt Payments as
a dependent variable and Income and unemployment as independent variables.
From the above result, the coefficient of the unemployment rate is favorable. However, the P-
Value is more than alpha (0.929>0.1), indicating the relationship is insignificant. The coefficient
of Income is almost the same as a "simple linear regression between Average household debt vs.
Median household income (Figure 2)." If there are some outliers in the data, that can cause this
situation. So, to analyze this situation, I created a Variable for the Debt Payment-Income ratio
(i.e., Debt Payment divided by Income.) After plotting the scatter graph for the balance, we can
observe that one point is too far away compared to the other points, pulling the line toward it and
resulting in a weaker relationship, in which 5% R-square backs up. After checking the data
provided, the data obtained from the City of Detroit's Debt payment-income ratio is deficient
compared to the other cities. So, the City of Detroit can be possible an "Outlier." We have two
options: remove it altogether or replace it with a value that is more consistent with respect to the
rest of the data. Let us consider replacing the unemployment rate of Detroit from 15.7% to 7.5%.
Figure 5: Figure: Debt Payment-Income Ratio Figure 6: After replacing the unemployment
vs. Unemployment rate of Detroit from 15.7% to 7.5%.
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Statistical Analysis Report
ISDS 513
Figure 6 gives the scatter plot after replacing the unemployment rate of Detroit from 15.7% to
7.5%, which is more reasonable compared to previous data. Also, R-square increased to 29%,
which means a more effective relationship. After that, we run the regression relationship between
Debt payments and Income & unemployment rate again.
From the above regression result, the coefficient of the unemployment rate becomes positive,
which is logical and makes sense. Also, the coefficient of Income has become positive, and the
unemployment rate and Income are statistically significant. The coefficient of Income is 0.1194
means the debt of payment will go up by the same value if Income is increased by one. In
contrast, the unemployment rate coefficient is 14.71843, meaning the debt payment will rise by
14.7183 if the unemployment rate increases by one. We know that the unemployment rate affects
debt payments more than Income.
Conclusion
In reality, we should consider the relationship of data from various points of view rather than just
depending on the provided data. Like in these cases, we got to know the City of Detroit was an
"Outlier," which was misleading the analysis. Also, at first, the relationship between debt
payments and the unemployment rate was negative and played a vital role in the data
comparison. In the real world, we should research the reason for unpredictable situations. In our
case, we used the Debt payment – Income Ratio to find that the City of Detroit was an "Outlier,"
We must go in-depth when analyzing data, even checking the small thing that can help us find
the outlier. With that, we analyze the data precisely and provide good output.
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