Economists: Jobs key to curbing consumer credit crunch

Advisers forecast 'mild recession' for the close of 2008

Having and keeping a job is the biggest factor affecting whether delinquencies on credit card and other consumer debt continues to rise as the economy slides into a recession, according to a group of prestigious economists.

Members of the Economic Advisory Committee of the American Bankers Association outlined their forecast for the economy and what could still be rocky times ahead for the banking industry during teleconference Thursday morning.

"The biggest driver of consumer credit problems is job loss ... whether or not they have a job and how quickly jobs are growing in this economy," said Jim Chessen, chief economist for the ABA, who noted that the rate of consumers who are 90 days or more late on credit card payments (called the delinquency rate) has been inching upward over the past several months. "Credit card delinquencies have risen somewhat as we would expect. They are a little bit above the five-year average."

Job losses
He added: "When you see 600,000 job losses this year it is natural to see delinquencies."

Another key factor affecting consumer lending? Divorce, Chessen said. "In California, a divorce leads to foreclosure in this housing environment."

Chessen noted that compared to other types of nonmortgage consumer loans, credit cards are faring better than auto loans or home equity lines of credit.

The ABA economic advisers are forecasting a "mild recession" as 2008 comes to an end.

"We do think the economy is dipping into at least a mild recession," said Peter Hooper, chief economist at Deutsche Bank and ABA economic advisory committee chairman. "The most recent economic data has moved us in that direction."

Market shake-ups
This week's shakeups in the financial markets -- with the Lehman Brothers bankruptcy, Merrill Lynch sale and Federal Reserve Board bailout of American International Group Inc. -- have also made a recession more likely.

Hooper and other economists don't expect things to ease until perhaps the second quarter of 2009, when they expect the housing market to have bottomed out.

Hooper characterized the situation on Wall Street as a "crisis of confidence" leading to "a cutting back of credit availability."

Chessen said the public should not view the current banking turmoil as an indication that the entire banking industry is in trouble. He noted that 98 percent of U.S. banks are well-capitalized with billions in reserves. "We believe that makes the industry well positioned to get through this economic downturn," he added.

See related: Card debt up, delinquency down in second quarter of 2008

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Updated: 11-25-2017