Consumer Credit Concerns on the Rise

Summary

Credit card delinquencies across the top 100 banks look poised to rise given languishing consumer search trends. We identify which states are more susceptible to rising interest rates and exposed to credit concerns.

Comment

Last week we highlighted the abrupt burst to 6.2% in delinquent payments on credit card debt held by banks outside the top 100. Forecasts indicate the top 100 banks, which are of greater concern, will see delinquencies rise from 2.5% to 3.7% over the next year. This model (elastic net regression) uses consumer search trends (Google) for stress and spending along with time series of charge-offs and delinquencies.

The scatterplot below indicates the frequency of consumer searches for ‘credit checks’ versus ‘credit concern.’ These concerns include debt relief, debt consolidation, payday loans, and more.

Louisiana, Nevada, Mississippi, Alabama, Missouri, Virginia, and New York stand out with consumers checking credit and heightened concern about an ability to pay down debt.

The next scatterplot shows how the level of U.S. 10-year note yields relate to state GDP (4-qtr average) since 2009. We grouped states by positive, negative, or no relationship to yields.

Negative: AK, IA, LA, MS, ND, NM, WY
Positive: AL, AR, DC, IN, KY, MD, MN, NV, OH, RI, UT, WA, WV

Mining and energy-focused states show a heightened (negative) sensitivity to rising yields.

Another metric for determining sensitivity to rising yields would be the prevalence of zombie companies. These companies have three-year average EBIT-to-interest expense ratios below one.

Nevada, Texas, Oklahoma, Louisiana, Alabama, Delaware, and New Hampshire house the greatest percentages of these so-called zombie companies.

The chart below shows the smooth function or relationship between each Google search trend and its impact on state GDP. The majority of these zombie-prone states show greater sensitivities to rising rates of addiction, isolation, mental, illness, social media, and gaming. Higher rates will likely only exacerbate these trends and potential for credit card delinquencies.