Sense on Cents

Which economic statistic is the most important? Unemployment? Housing starts? Trade deficit? Inflation? Retail sales?

Well, they are all important . . . but as I review the many statistics, the economic data that I believe most significant are loan delinquencies. Now, mind you a delinquency does not mean that the loan has defaulted and been foreclosed upon. A delinquency is merely a late payment. Typically loans are classified as 30 day, 60 day, or 90 day delinquent. There is a very high correlation between delinquent loans and those that default.

Loans become delinquent for a whole host of fairly typical reasons. That said, in this economy the nature and array of reasons are growing. As a result, the ability of lenders to forecast and manage delinquencies is increasingly more challenging. Lenders will typically increase reserves as loans become more delinquent in anticipation of a natural rate of default.

Loan delinquencies will often occur even before unemployment hits or sales falter. As individuals or companies feel increasingly squeezed, the monthly loan payment becomes more difficult to make and delinquency results.

While green shoots may appear across our economic landscape, the pace of delinquencies is surging. Some economists will assert that they have forecasted it; however, the government in the Bank Stress tests were clearly too conservative in their default assumptions. Over and above that, any self-respecting analyst will tell you that banks and other lenders (insurance, smaller thrifts) have significantly under reserved against future losses.

So how are these delinquencies doing? Market Watch reported yesterday that  Fed Says First Quarter Delinquency Rates Surge:

The Federal Reserve said on Monday that delinquency rates on all loans jumped to their highest level since 1991, with delinquencies on credit cards hitting the highest rate on record. In addition, the Fed said, all consumer loans hit a delinquency rate of 4.7%, also the highest rate on record, while delinquencies on residential real estate hit the highest rate on record as well. Delinquencies on commercial real estate hit 6.4%, the highest rate since 1993, the Fed said.    

This data is not a green shoot nor is it anywhere close to peaking. That fact would be less meaningful if banks aggressively reserved against future losses, but almost all of them have been negligent in setting aside the necessary reserves.  

Loan delinquency data is not regularly highlighted for obvious reasons. In my opinion, however, a decrease in delinquencies will precede a turn in the economy with much greater precision than any other economic statistic.

LD

This entry was posted on Tuesday, May 19th, 2009 at 6:37 AM and is filed under Economy, General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.