Consumer Credit At Risk On The Rise

A major factor impacting recovery performance in 2008 – and will continue to be a factor this year – is unemployment. Not only does unemployment and “underemployment” have a direct consequence on consumer liquidity, it represents long-term risks as well.  The addition of nearly 3.5 million people to the ranks of the unemployed, along with another 3.4 million forced into part-time employment, undoubtedly played a major role in pushing consumer bankruptcy filings to 1.1 million during 2008, a year-over-year increase of 30%. Although many factors play a role in what eventually leads to bankruptcy, the affects of employment and labor market performance – unlike catastrophic injury, divorce, or other unforeseen influencers – have been tracked to show a decided cause and effect. Therefore, unemployment provides a tangible gauge of potential bankruptcy default.

To give ARM companies a monthly barometer of how bankruptcy and employment levels are likely to impact collections, Kaulkin Ginsberg has created the Consumer Default Risk Index (CDRI).  This indicator shows the dollar amount of outstanding credit that is at risk of non-contractual default due to bankruptcy. 

Growing unemployment has caused the CDRI to rise nearly 106% compared to this time last year, translating into $20.04 billion worth of consumer credit at risk for the December monthly filing period.  The $20.04 billion figure represented a year-over-year increase of over 110% from last year.

The year-over-year increase of 30.0% in consumer bankruptcy filings is troubling but not wholly unexpected as jobless levels in the U.S. have trended upwards throughout the year.  The 7.2% unemployment rate reached in December represented a 7.5% increase month-over-month and a 44% increase year-over-year.  Overall, 2008 saw the addition of nearly 3.5 million people to the ranks of the unemployed, resulting in an environment where households that were already over-leveraged are now quickly slipping into distress.

The likelihood of a monthly improvement to the CDRI remains slim. Initial jobless claims rose to 524,000 in the first week of January – an indication that employers had accelerated job cuts to start the year.  For debt collection companies, the increase in CDRI risk indicates a likelihood of increased placements, with a caveat.  For credit issuers, the likely way to reduce the amount of credit at risk will have to come from a reduction in the extension of credit, meaning a possible reduction in delinquent receivables in the upcoming 90 day cycle.

The Consumer Default Risk Index is one of the proprietary indicators from Kaulkin Ginsberg’s Data Service.  For more information on the CDRI or the Data Service, please contact Dimitri Michaud, Consumer Finance Analyst for Kaulkin Ginsberg at 240-499-3840 or by email.