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.
Historically, how much the unemployment rate has moved the consumer credit risk? Let’s look at US credit cards as an example:
Unemployment rate +243 bps
Card charge-off rate +132 bps
Unemployment rate +223 bps
Card charge-off rate +137 bps
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%.)