Are credit card delinquency rates a harbinger of economic weakness?

November 24, 2023 Insight from Eric Van Enk, Wealth Advisor & Associate Portfolio Manager

This week’s chart depicts data on U.S. credit card delinquency rates as of June 30th. You will notice a return to pre-pandemic delinquency rates for U.S. consumers overall, however, consumers in their thirties are experiencing the highest delinquency rates since 2011. Interestingly, this age group also led the trend of higher credit card delinquencies prior to the 2008 Global Financial Crisis. Given we’re currently experiencing the highest interest rates ever for credit cards, we believe delinquencies will continue to increase until interest rates are reduced. The other consumer-focused interest rates we track, although not at record highs, are at the highest levels in well over a decade - personal loan rates are the highest since Q3 2007, car loan rates are the highest since Q3 2001, and mortgage rates are the highest since Q3 2000.

Source: National Bank Financial

As discussed in prior articles, monetary policy works with long and variable lags (increasing interest rates eventually slow the economy). Given interest rates are at their most restrictive levels since the 1980s, we continue to see a significant probability of a recession in the U.S. Canada is already experiencing a technical recession (two consecutive quarters of declining GDP) which could get worse before the Bank of Canada lowers interest rates. After being completely outwitted by inflation in 2021-2022, we expect central banks like the Bank of Canada and the U.S. Federal Reserve to wait until they have overwhelming evidence that inflation has returned to their 2% target prior to cutting interest rates.

This recency bias could lead central banks to leave rates too high for too long to avoid a hard landing for the economy. When we examine the historical length of restrictive interest rate cycles, we see that our current experience isn’t unprecedented. By our estimates, U.S. rates have now been in restrictive territory for 14 months. Leading into the Global Financial Crisis of 2008, interest rates were restrictive for 25 months and the initial rate cut didn’t occur until 22 months after the Federal Reserve increased rates. If we use the 2005 – 2008 experience to attempt to predict the current interest rate cycle in the U.S., we would expect to see interest rates remain restrictive until the fall of 2024 and for the first rate cut to occur next spring.

National Bank Financial - Wealth Management (NBFWM) is a division of National Bank Financial Inc. (NBF), as well as a trademark owned by National Bank of Canada (NBC) that is used under license by NBF. NBF is a member of the Canadian Investment Regulatory Organization (CIRO) and the Canadian Investor Protection Fund (CIPF), and is a wholly owned subsidiary of NBC, a public company listed on the Toronto Stock Exchange (TSX: NA). The information contained herein has been prepared by Eric Van Enk, Associate Portfolio Manager and Wealth Advisor at NBF.  I have prepared this article to the best of my judgment and professional experience to give you my thoughts on various financial aspects and considerations. The opinions expressed herein, which represent my informed opinions rather than research analyses, may not reflect the views of NBF. The opinions expressed are based on my analysis and interpretation of historical data. Values and returns will fluctuate, and past performance is not necessarily a guarantee of future performance. The particulars contained herein were obtained from sources I believe to be reliable but are not guaranteed by me and may be incomplete. The opinions expressed are based upon my analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein. The securities or sectors mentioned herein are not suitable for all types of investors. Please consult your wealth advisor to verify whether the securities or sectors suit your investor's profile as well as to obtain complete information, including the main risk factors, regarding those securities or sectors.

Contact us

Get contact information for our team members and find out where our offices are.