Those who are optimistic of the recessionary trend waning toward early next year would need to think twice. The financial sector crisis is far from being over and credit card delinquencies would be the next wave to hit them.
That the US consumers are in great distress is nothing new. Please refer to my article http://www.rediff.com/money/2008/nov/06bcrisis5.htm. As they are cutting back on consumption with great vigour, the US economy is feeling the hit, and big time at that. But that is only a part of the story. The US consumers are now finding it increasingly difficult to even make payment for their credit card dues. The rising rate of credit card delinquencies clearly shows the stress they are in.
This becomes amply clear from the following chart:
Source: Federal Reserve Bank
The 4th quarter delinquency rate (@ 5.56%) is the highest in over a decade and is unlikely to reverse anytime soon. The recently released data for the month of January shows total outstanding credit at more than USD 2.5 trillion. Nearly 40% of this (or about USD 1 trillion) is revolving credit and that’s a big worry.
It is quite well known that late payments and defaults on credit cards are closely linked to levels of unemployment, which have risen dramatically. Non-farm employment fell 524,000 in December, contributing to the biggest decline in payrolls on a three-month moving average since 1945. The unemployment rate jumped to a 15-year high of 7.2%, from 6.8% in November.
Surely we are not going to be out of the woods anytime soon.