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  • Frank Tian

Unemployment Rate vs. Consumer Credit Risk

🇺🇸 Fed’s Unemployment Rate Forecast


And its implication for consumer credit risk. 👇


When Fed hiked the rate by another 75 bps on 9/21, it updated the forecasted unemployment rate in 2023:


Now 4.4% vs. 3.9% in June projection.


Consumer credit performance follows the unemployment rate closely (with a 3-6 months lag), because the increase in the unemployment rate means a reduction in income.


The exception is during the pandemic: the lost employment income was compensated by public and private assistance programs.



🟧 HISTORY


Historically, how much the unemployment rate has moved the consumer credit risk? Let’s look at US credit cards as an example:


1989-1992

Unemployment rate +243 bps

Card charge-off rate +132 bps


2001-2003

Unemployment rate +223 bps

Card charge-off rate +137 bps


2007-2010

Unemployment rate +550 bps

Card charge-off rate +704 bps


🟦 LOOKING AHEAD


The modeling team can do a better job to quantify your own portfolio performance vs. the unemployment rate.


Here by simple math, the forecasted +80 bps of the unemployment rate (vs. Q2 ‘22) will push the card charge-off rate by 50~100 bps in 2023.


The good news is that the credit card charge-off rate is historically low: <2% as of Q2 ‘22.


Even with a 100 bps increase, it will be still below the pre-pandemic level of ~3.7%.


(Update: in December 2022, the Fed raised the median unemployment rate forecast in 2023 to 4.6%.)

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