Could A Recession Be Looming? Credit Card and Car Loan Delinquencies Pass Pre-Covid Levels

By moomoo news Kiki

With the release of October CPI report, the rapid cooling in US inflation supports many analysts' expectations that the economy will achieve a soft landing. However, some leading economic indicators are not optimistic. Markets are focusing closely on immaculate disinflation, while ignoring the deterioration of some leading indicators that may indicate an economic recession.

Data from Q3 Quarterly Report on Household Debt and Credit released by New York Fed shows that Credit card balances grew $48 billion this quarter and marked the eighth quarter of consecutive year-over year increases.The $154 billion nominal year-over-year increase in credit card balances marks the largest increase since the beginning of time series in 1999.

“As interest rates feed through from the federal funds rate to interest rates on mortgages and credit cards, that affects everyday consumers,” said by Sofia Baig, an economist at decision intelligence company Morning Consult. “So with elevated interest rates, paying that debt becomes more expensive, and with consumers continuing to take on more debt, delinquency rates increase significantly.”Credit card delinquencies have now surpassed pre-pandemic levels.

Source: New York Fed Consumer Credit Panel / Equifax, Apollo Chief Economist

Source: FRBNY Consumer Credit Panel, Equifax, Haver Analytics, Apollo Chief Economist

Default rates will continue to rise as corporate entities grapple with higher interest rates for what might be a longer haul ahead, that compounded with slower growth, straining many firms at the lowest ratings already showing negative cash flow to debt.

Source: Moody's Analytics, Apollo Chief Economist

US bank lending contracted year-on-year, with the only prior contraction since 1955 was during ‘2008/2009’, all previous rapid declines leading to recessions.

“Loan growth has slowed dramatically,” Morgan Stanley banking analyst Betsy Graseck wrote in a note to clients. “Our view is weak loan growth reduces NII growth into 2024.” According to Morgan Stanley, the 25 largest US banks by assets had loan growth slow considerably since the start of the year to about 1.5 per cent from a year earlier, when it had been tracking at 8 per cent.

Source: FRB, Haver Analytics, Apollo Chief Economist

Although inflation has slowed, it is still a long way from the Federal target rate of 2%. The Federal Reserve might not lower interest rates in the near future and that interest rates are expected to remain high for a while. Based on that, more Americans are failing to make payments on their credit cards and auto loans, corporate defaults continue to rise and economic downturn may hint the possibility that a recession is coming.

Source: New York Fed, Apollo Academy, S&P Global, Bloomberg, CNN Business