Charge-Offs Continue To Mount
Over 13.2 million people found themselves unemployed as the first quarter of 2009 ended with the jobless rate hitting 8.5 percent. Not only is this the highest unemployment rate since November 1983, but since the start of the year, unemployment has already expanded by 12 percent and more than 66 percent since the same period last year.
Although the current focus on unemployment seems overdone, the pining over of job losses and joblessness are a direct consequence of unemployment’s deteriorating effect on outstanding credit. High unemployment doesn’t just affect consumer confidence; it also affects outstanding credit performance and the collectability of those credit lines.
This close correlation between employment and credit performance is displayed clearly in the recent Kaulkin Ginsberg Consumer Finance Report – reporting for the month of February – where the 61 percent year-over-year increase of the charge-off rate within the Credit Card Performance Index (CCPI) was matched by a similar increase of 68 percent in the unemployment rate for the same timeframe. The charge-off rate for credit cards in the index, 8.43 percent, nearly matches the current unemployment rate.
As of March, the number of unemployed persons had increased by 694,000 to over 13.2 million with a corresponding unemployment rate of 8.5 percent nationally. Although murmurings of economic improvement have begun with guarded optimism that we’ve indeed hit the bottom, the continued loss of jobs will prolong the negative trends seen in consumer credit with mounting charge-offs as just one example.
All A State Of Mind
Mass layoffs, bank failures, rising unemployment: the Great-Panic of 2009. This may very well be the end of the world, or so we’re being led to believe.
With each proceeding day comes another round of wrenching economic news. Along with 24/7 coverage of every job loss, every foreclosure, and every Wall Street banker now wearing threadbare Armani, it’s almost as though the pseudo-psychological beat-down can’t be escaped – not on a plane, not in a train. And with a souring economy and consumer confidence at historic lows, the most recent Discover Spending Monitor reported that nearly 30 percent of consumers are planning to further decrease their household spending.
It’s gotten to a point where it appears all industries seem vulnerable, not even Valentine’s Day was safe, with many weary consumers opting out of spending $100 for a dozen roses.
But need it be so? Should we be so quick to stiff loved ones of their much deserved dozen roses – priced appropriately for our nation’s favorite Hallmark holiday?
Yes the unemployment rate is at 7.6 percent and rising, but should we not consider the inflationary effect of the 16yr-19yr old labor force demographic which has an unemployment rate of 20.8 percent? Should those with a college degree not consider the 3.8 percent unemployment rate among their peer group before joining the frenzied masses?
Times are indeed difficult but optimism will prove to be a virtue.
Such a positive state of mind was summed up best by a recent radio interview discussing one man’s decision to spend money on Valentine’s Day:
Interviewer:
“Sir why have you chosen to spend money on flowers during such tough economic times?”
Man:
“I’m fine; I’ve chosen not to participate in the recession!”
Staunch optimism as economic philosophy; maybe we should all follow suite and chose not to participate!
When Psychology Meets the Budget - Does Obligation Override an Emaciated Piggybank?
With a 10.6 percent state unemployment rate I wonder, “Is it tough to collect in Michigan?”
Without a doubt, the single largest factor holding headlines, affecting households, and impacting recovery efforts – currently and for the foreseeable future – is unemployment. So as the prospects of a deepened recession come ever more present, the final week of January provided us all with a much needed silver lining in the barrage of bad news: “We only lost 71,400 on Monday.” Not a bad start to the New Year!
So with nearly 19.2 million people either out of work or unable to find a full time job, a question continues to loom for those involved in credit creation, collections, and those in the middle: what exactly is the psychological affect of the current economy on debtors and how is it affecting collection efforts?
An intangible, yes, but then again anything dealing with consumer psychology will inevitably be intangible. As gray of an area as psycho-analysis might be, it still seems a pertinent question. If for every one person that loses their job, 10 neighbors, friends, and family members hear about the event and become cautious, what is the toll for the ARM industry?
A quantifiable example of the psychological impact of current economic conditions can be found in the latest consumer confidence index, released this week by the Conference Board. The January consumer confidence index hit an all-time low, 37.7. The number was down from 38.6 in December. Since the Conference Board began tracking the data in 1967, the reading has never been so low.
With unemployment at a fifteen year high and consumer confidence at historic lows, I’d like to hear from our audience their predictions of how this might affect their businesses during the first half of 2009.
Unemployment, Underemployment, and Justifiable Collective Hysteria
Mass hysteria – a sociopsychological phenomenon where a common belief or anxiety manifests itself among a group of people. Has our current fixation on monthly unemployment numbers during this financial crisis come to exemplify mass hysteria?
Whether you deem the current dearth of consumer confidence a baseless media-driven collective anxiety or not, one thing is certain: Americans are losing their jobs. The unemployment rate has risen from a reading of 4.9 percent in January to October’s 6.5 percent. But what does this all mean?
From a historical perspective, the last time unemployment reached this level was March of 1994; a banner year – not quite. But the rapid rise in the unemployment rate only tells part of the story. In the shadowy nether regions of assessing a more realistic view of the labor market exist terms such as “discouraged workers” and “marginally attached workers”, as well as the underemployed.
If these other labels for workforce participants (or non-participants) are all taken into consideration, the total unemployment rate hit 11.8 percent in the month of October. And this isn’t fringe economy crazy-talk: the Department of Labor releases that figure in the footnoted bowels of its monthly unemployment report.
The last time the so-called alternative measure of unemployment was this high was January 1994, as the economy exited the recession of the early 90’s and before the tech-boom that lifted us out of that morose situation a few years later. Undoubtedly for the time being, unemployment will be the single largest factor influencing consumer sentiment as well as recovery performance on debts owed.
With news that 516,000 Americans filed for initial jobless benefits just last week – a 25 year high – the final leg of 2008 appears it will be a difficult one. Just how long we’ll being holding our breath for improvements remains uncertain. The accounts receivable management industry will certainly be waiting for improvements in the unemployment rate; that economic measure has proven to be the most important indicator of collection performance over the years.
The Banking Landscape Potentially Transformed
During the latter part of September the financial markets were subject to some major shifts; we essentially watched the U.S. banking landscape transform in a matter of weeks.
We saw JPMorgan Chase purchase the banking operations of Washington Mutual after it was closed by the Office of Thrift Supervision. Wells Fargo finally ended its squabble with Citigroup last week over its acquisition of Charlotte, N.C.-based Wachovia. These headline grabbing purchases only helped to push forward the consolidation being witnessed within the banking sector.
With the nation’s banking largest institutions now gobbling each other up and the credit crisis continuing to batter the industry for both large and small players alike, there is a strong probability that the once fragmented U.S. banking system will likely continue to experience significant changes.
One such probable change would deal directly with the federal cap on the percentage of overall U.S. deposits an institution can control. The current federal regulatory limit for banks is 10 percent of all U.S. deposits. But with the recent string of acquisitions bringing Bank of America, Citigroup, and JPMorgan Chase to a combined 31.3 percent of U.S. deposits, it has become clear that in the era of the super-banks the 10 percent cap has already been breached, and will need to be increased or augmented in some fashion.
As of June 30, 2008 Bank of American, JPMorgan Chase, and Citigroup had total domestic deposits of $701 billion, $497 billion, and $266 billion respectively. Wells Fargo, Wachovia, and Washington Mutual had total domestic deposits of $293 billion, $422 billion, and $188 billion respectively. After all of the acquisitions take force, Chase will have nearly $800 billion in deposits, Wells Fargo $720 billion and Bank of America $700 billion.
Another potential regulatory change, brought front and center as a result of the ongoing credit crisis, deals with the current FDIC deposit insurance level. As a part of the $700 billion bailout/rescue package, the FDIC coverage for bank deposits was temporarily increased to $250,000 per account from $100,000 through 2009. As the financial crisis steers more individuals towards regular bank deposit accounts, there is the possibility that the appetite may be there for this temporary coverage increase to become a permanent one for a U.S. populace still trying to decipher all the negative economic headlines.
Composure While Under Pressure
For those in the credit market, equanimity is a virtue that will be tested. Nothing can prove more unsettling than bad news, and in today’s current financial environment, bad news is in abundance. But as the federal government executes its rescue package and creditors across the board reassess their lending guidelines and risk mitigation procedures during this economic calamity, those with a more grounded approach to growth will certainly survive.
This may seem a bit optimistic, but there are strong companies out there. For example, during the frenzy of the housing boom, banking institutions that focused on core business operations rather than diving headlong into the housing market for quick growth have faired much better than their competitors. A good example of this is PNC Financial Services Group, whose profit actually rose 19 percent in the second quarter while also finalizing its 2008 acquisition of Sterling Financial, a multibank holding company.
Though there are some bright spots, there are indeed also causes for anxiety. The general upward trend in delinquencies and charge-offs across many debt types has lasted for over a year and economic conditions, especially unemployment, remain troubling. But just how bad could the deterioration in credit quality get?
In a recent article, credit card charge-offs were projected by a research firm as potentially reaching a total of $96 billion for 2009. How likely is such an increase of charged off credit card debt?
If you were to take the total outstanding receivables of the top 15 largest credit card issuers – the top 10 make up between 85-90 percent of the market – these institutions would have to maintain an average charge-off rate of at least 12 percent for the entirety of 2009. Impossible? No, but highly improbable.
Even considering a job market that is likely to remain weak, a 12 percent charge-off rate seems difficult to imagine. In June of 2003, when the unemployment rate reached 6.3 percent, the charge-off rate within the Standard & Poor’s Credit Card Quality Index was just a little over 7.0 percent. During the weak employment environment between 2002 and 2003, the index reported an average charge-off rate of 7.0 percent. With an average charge-off rate of 7.0 percent, you’d be looking at a total of about $54 billion in charged off card debt by the end of 2009 – not taking into consideration tightened lending standards or any increased emphasis in pre-charge off collection efforts in the current economic environment.
It will get worse in financial services before it gets better. But a little perspective goes a long way before declaring another Great Depression.
Personal Income Gains Tamped Down by Inflation, Unemployment
In their most recent release, the Census Bureau reported that median annual household income in the U.S. rose by 1.3 percent in 2007 to $50,233. In addition, real earnings for both men and women also experienced gains in 2007. Real median earnings for men and women who worked fulltime on a year-round basis rose 3.8 percent and 5 percent respectively, following three years of annual declines.
But in spite of this relatively good news, the reality is that 35.5 percent of American households still bring in less than $35,000 annually.
Furthermore, for households in the 20th percentile of income distribution, annual income actually fell 1.5 percent to $20,291. It is how these low to moderate income households have faired since the end of 2007 that remains a focal point to creditors and the accounts receivable management (ARM) industry regarding collections performance.
Although the sharp increases experienced in consumer prices over the months of May, June and July have only acted to further strain these low to moderate income households, of particular concern has been the health of the job market.
Unemployment – arguably the most important factor in ARM industry performance – now stands at 5.7 percent and inflation is now at 5.6 percent, so it is obvious that the income gains reported for 2007 have not held. As these less affluent households contend with their debts and other obligations, the job losses observed through the first half of 2008 are widely expected to continue into 2009.
What is certain is that current incomes are lower than their 2007 levels and with disposable personal income (DPI) having decreased by 1.9 percent in June, the likelihood of a turnaround in collections performance from a disappointing second quarter is unlikely.
Confidence, Public Perception and Collectability
Aside from calamity, few things have a more acute impact on consumer sentiment than price increases on consumer goods. U.S. households devote both time and energy in constructing and following (or at least attempting to follow) a monthly budget to save money. But as strictly as consumers try to follow their budgetary guidelines, in today’s economy Americans are finding it increasingly difficult to maintain these spending limits with consumer price inflation -- now at 5 percent as of July for urban consumers -- raising the cost of goods and services.
To compensate for what seems to be the weekly increase in the cost of everything, consumers have shifted their financial habits signaling intentions to reduce monthly savings, cut back on outings to the movies or eating out, and putt off that planned vacation. It’s really no wonder consumer confidence has fallen off a precipice over the last year.
But for those in the accounts receivable management industry, creditors and collection agencies alike, most concerning is the continued weakness of the job market. June’s loss of 62,000 jobs was followed by July’s shedding of an additional 51,000 jobs, bringing the unemployment rate to 5.7 percent, a four year high (“Unemployment Rate Jumps to 5.7 Percent, Four-Year High,” Aug. 1). Adequate job security or not, this news continues to affect consumers who evaluate what does and does not take priority when checks go out on the first of the month – directly impacting those servicing or collecting on delinquent accounts.
With this economic environment and corresponding consumer negativity it’s little wonder that the Kaulkin Ginsberg Index (KGI) – the leading indicator of economic conditions affecting the accounts receivable management (ARM) and debt management industries – continued its year-long descent. In its most recent reading the KGI tumbled 8.0 percent year over year (“ARM Index Shows Continuing Erosion of Collection Environment,” May 30).
As more consumers find themselves hunting for a job or stumbling into part-time employment, the adverse effects of the increasingly weak job market will continue to impact the collection of bad debt.
Though the ARM industry is generally considered to be recession-resistant, no industry is recession-proof.
The question that remains to be answered: Just how deeply has the one-two combination of “price increases” and “rising unemployment” affected the bottom line of the ARM industry? How deeply will these factors affect your bottom line?
I'd love to hear our readers chime in and give us their perspective on the current operating environment.
Credit Card Delinquency Rate Decline Could Prove Short Lived
Credit card delinquencies, like charge-offs, have trended upward over the past year. That is until recent reports on the credit card market by both TransUnion and Standard & Poor’s noted that credit card delinquencies – defined as the percentage of borrowers 30 to 90 or more days past due – had experienced a moderate decline.
In its monthly analysis of the U.S. Credit Card Quality Index (CCQI), Standard & Poor’s reported that the delinquency rate for the CCQI – comprised of 22 master trusts of bank card and credit card backed securities – declined from 4.5 percent in March to 4.4 percent in April, following eight consecutive months of increases.
On a similar note to the findings by S&P, TransUnion in its quarterly credit card analysis reported that for the first time since the beginning of 2007, the average national credit card loan delinquency rate experienced a relevant quarterly decline in the first three months of 2008. According to TransUnion, the ratio of credit card borrowers delinquent on one or more of their credit card accounts declined to 1.19 percent in the first quarter of 2008, a drop of 12.5 percent from the previous quarter.
Amid the continued deterioration of credit card debt quality within the U.S. market, this news was a welcomed reprieve. As stated by Ezra Becker, principle consultant in TransUnion’s financial services group, this development may signal that “consumers have begun to take stock of their overall debt and begun to catch up on their repayment schedules.” Though a bit optimistic, this could be a plausible conclusion as negative sentiments regarding the current economy, job market and personal financial stability continue to hammer away U.S. consumers’ willingness to take on new debts.
So if cash-strapped consumers are now paying off debts instead of taking on more, creditors will need to figure out how exactly their internal recovery efforts help position them within consumers’ minds as the creditor of first choice for repayment. And if this latest round of delinquency data proves to be an anomaly, expect to see late payments rise again later in 2008.
Gasoline Price Milestone and the Frugal Consumer
As the price of necessities such as gasoline have continued to climb, the economic mood remains negative as illustrated most recently by the Conference Board’s Consumer Confidence Index, which declined yet again from 62.8 points in April to 57.2 points in May. This was an overall decline of more than 47 percent from the 108.5 points reported in May of 2007.
Household budgets already stretched precariously thin during recent months, were met on Sunday with another milestone -- record breaking gasoline prices. The American Automobile Association (AAA) announced that the average price of gasoline nationwide reached $4 a gallon for the first time in history. Undoubtedly the soaring price of gas, which has risen 29 percent over the past year, has done its part in dampening consumer sentiment.
This consumer pessimism is hard to argue with and signal consumers have remained challenged by the broader economic downturn. Now with the average price of gasoline in the U.S. at $4.00 a gallon and spending on fuel accounting for more than 6 percent of wage income, the fear that has come front and center is the risk of declining consumer spending as confidence plummets.
Fears of slowed spending are understandable with the unemployment rate now standing at 5.5 percent and as 54 percent of consumers surveyed by the Discover Spending Monitor saying their personal finances are getting worse ("Discover U.S. Spending Monitor Rises 1.4 Points in May," June 4). Most telling, 42 percent of respondents reported putting less into saving as a response to high fuel costs, while 48 percent of respondents planned to spend less on discretionary purchases, up five points over the last three months.
Tightened budgets and a heightened awareness of one’s financial burdens will inevitably produce a difficult recovery environment for collectors, but to what extent will the severity of this slowdown be felt in accounts receivable management and for how long, remain to be seen.
