Introduction

Debt and Delinquencies Up

Debt and Delinquencies Up

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Thanks to the New York Fed, we are getting our first glimpse into first quarter numbers, and it’s not a pretty sight. Household debt hit a new record at $14.3 trillion. That’s not a surprise; it’s been rising every quarter since 2013 and is now $1.6 trillion higher than its previous peak in 2008.

The effects of COVID-19 will not really be seen in first quarter numbers, we’ll have to wait for June data to get a better idea of the toll this pandemic will take on the U.S. economy. What we do know so far:

  • Credit card debt decreased by $34 billion during the first quarter. That is pretty typical, post holiday behavior, but
  • Credit card debt is $45 billion higher than at March 31, 2019.
  • Credit demand is waning. The Consumer Financial Protection Bureau (CFPB) reported a sharp decrease in new credit inquiries in March, just as pandemic-related unemployment claims were beginning to come in.
  • Credit issuers started getting tougher on applicants as they began raising their standards even as demand began to slow.
  • The percent of credit card debt recorded as seriously delinquent (90 days or more past due) rose by just one basis point in the first quarter, but we know that’s just the tip of the iceberg.

Perhaps the latest Beige Book is a better indicator of what to expect in the near term. It usually gives us a good glimpse into the minds of bankers and business owners in different parts of the country. And, although the information in it was all collected before April 7th, that short amount of time made a world of difference.

According to the Beige Book, “Economic activity contracted sharply and abruptly” across the U.S. “Employment declined in all districts, steeply in many cases.” And, with the exception of essential services, the direction of inflation was down, as were wages.

The Beige Book is replete with such phrases as “deteriorated rapidly”, and “contracted sharply”. The outlook for the next several months is not any better. Notable exceptions included software, IT and, in some cases, manufacturing.

That brings us to the final report we are going to parse today, the Unemployment Report from the Department of Labor, which was released on Thursday, May 7th. During the week ending May 2nd, 3.2 million Americans filed for unemployment benefits. That, after the previous week’s number was revised up by 7,000 to almost 3.9 million.

As of April 25th, the seasonally adjusted unemployment rate was 15.5%, up from 3.5% less than two months ago. (It was 14.7% for the entire month of April.) As of April 18th, four states already had unemployment rates exceeding 20%: Vermont 25.2%; West Virginia 21.9%; Michigan 21.9%; Rhode Island 20.4%. Nevada was right behind at 19.9%. With 3,045 new claims the following week, Nevada is almost certainly over 20% now.

Washington State reported the highest increase during the week ending April 25th, with 56,000 new claims. California actually reported 203,000 fewer initial claims that week. The robust job creation and low unemployment we grew accustomed to the past couple of years is a world away now.
That brings us to the list on page 7. Because, what happens when people lose their jobs? Often times, they use their credit cards to pay for necessities. In that eventuality, credit card loan quality could be severely diminished.

The 50 banks listed on page 7 have the highest volume of credit card loans on their books as of December 31, 2019. We included the delinquent amount as of that date so we have a baseline. As we go forward, we will be able to see the impact of COVID-19 induced unemployment on these numbers.

Because all consumer loans are apt to be impacted, we also included:

  • total gross loans, so you can get an idea of how much (or how little) of the entire portfolio is in unsecured credit cards; and
  • the percent of consumer loans that are in unsecured credit cards.

These are things we will be keeping a very close eye on over the next several quarters. This is just a starting point. The good news is that we are starting from a position of great strength. That should prove invaluable.

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