Economic Indicators Point to Mixed Outlook for ARM Industry

Last week, unemployment and credit card statistical information was released for the 3rd quarter and the results were less than favorable for ARM professionals anticipating improved liquidation results in the short term. Understanding the trends enables credit grantors and ARM companies to plan prudently for a long and bumpy recovery from the most pervasive recession in the history of the debt collection industry.

The U.S. Bureau of Labor Statistics released September unemployment information last week and the results continue to reflect a protracted recovery. The number of unemployed persons nationally, at 14.8 million, was essentially unchanged in September, and the national unemployment rate held steady at 9.6 percent. The number of people considered outside the labor force actually increased by 175,000 and those counted as employed but only working part time rose 612,000 driving the under-employment rate, a better barometer for recovery professionals, to 17.1 percent. The biggest drop was found within the government sector, reflecting a decrease in temporary jobs for Census 2010 and reductions in local government positions. For the ARM industry, the bleak unemployment picture is cause for some concern. Lost or reduced household income severely reduces consumers’ ability, and in some cases willingness, to meet their financial obligations. Additionally, sustained high unemployment levels have a negative psychological effect on consumers: confidence that labor markets are improving is necessary in order to motivate people to spend (and eventually repay).

On a related note, total payroll amounts were down for the month with no increase in the labor input into the economy and barely any rise of wages. Stagnant wage income does not bode well for consumer spending prospects and it does not bode well for improvements in liquidation results for ARM companies. It is worth pointing out the potential silver lining that government downsizing will create some expansion opportunities for collection agencies servicing local and state government agencies seeking to cut expense and improve results by outsourcing business functions such as debt collections to third party experts.

Also last week, The Federal Reserve released its monthly consumer credit statistical report – also called the G.19 report. Revolving debt, mostly comprised of credit card debt, fell an annualized 7.2 percent in August, or by $5 billion, to $822.2 billion. Revolving debt also fell by 7.2 percent in July. Non-revolving debt – like that found in student, auto and personal loans – increased 1.2 percent in August after expanding at a 0.7 percent in July. Total consumer credit card debt outstanding decreased in August for the 24th straight month. Consumer credit card debt levels now are at the same level as in late 2005 after peaking in mid-2008. Total consumer credit outstanding in the U.S. was $2.414 trillion at the end of August after peaking at $2.582 trillion in July 2008.

Moody’s also reported that card charge-offs at major issuers climbed back over the 10 percent mark in August after improving slightly over the early summer. Delinquencies, however, continue to improve, with August’s average reading falling below 5 percent. The improvement in delinquencies could signal reduced placement volumes and amounts available for purchase directly as issuers have already worked through a backlog of old bad debt. We anticipate that top performing agencies, diligent about compliance, and far removed from headline risk will be rewarded with steady or increased placement volumes while underperformers will be cut from agency networks.

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