Nonfarm payroll employment in June declined 467,000, following a revised fall of 322,000 in May and a decrease of 519,000 in April. The June contraction in jobs was worse than the market forecast for a 350,000 decrease. Personal income in June fell back heavily due mostly to an end to a specific fiscal stimulus program. As a result, U.S. consumer loans delinquencies and credit card delinquencies rose to record highs in the second quarter. These negative developments are impacting the card issuing banks such as Bank of America Corp (BAC), Citigroup (C), and JPMorgan Chase (JPM).
Fallout from a still deteriorating housing market caused the rate of consumer loan payments at least 30 days late to rise to 3.35% in the April-to-June period up from 3.23% in the first quarter. Late payments on home equity borrowings set records, rising to 4.01% from 3.52% on loans and to 1.92% from 1.89 percent on lines of credit. The overall delinquency rate actually understates consumer hurt because it excludes bank-issued credit cards, where credit deterioration was severe. The rate of credit card delinquent accounts rose to 5.01% from 4.75%, breaking the record of 4.81% in the spring of 2005.
Nonfarm payroll employment in August fell 216,000 compared to the consensus estimate of 170,000. Goods-producing jobs dropped 136,000 in August, following a 122,000 decrease the month before. Year on year, personal income growth slipped to minus 2.6% in August from minus 2.5% in July. As a result, Bank of America Corp and Citigroup customers defaulted on their credit card debts in August at the highest rates since the onset of the recession, a sign that the banks' consumer lending woes are far from over.
Bank of America said its charge off-rate -- loans the company does not expect to be repaid -- rose to 14.54% in August from 13.81% in July. Citigroup, the largest issuer of MasterCard-branded credit cards, said its charge-off rate rose to 12.14% in August from 10.03% in July. The trend was wide spread among most other major credit card issuers, denting optimism sparked when many banks and specialty finance companies reported lower default rates for July. JPMorgan Chase, the largest issuer of Visa-branded credit cards, said its charge-off rate rose to 8.73% from 7.92%, while smaller Discover Financial Services said its rate rose to 9.16% from 8.43%. However, American Express's default rate fell to 8.5% from 8.9% due to increase in its lending portfolio.
News flow indicating increased credit card defaults took a toll on the stock prices of card issuing companies. Shares of Bank of America fell 4.2% to $16.21, JPMorgan declined 5.6% to $41.37, Discover (DFS) was 1.42% lower at $16, and Citigroup dropped 6.4% to $4.53. Capital One (COF) declined 5.85% to $33.64, while American Express (AXP) which initially gained 1.8% lost 4.25% to end the day at $32.46.
As credit card losses increased to record highs in recent months, credit card issuers closed millions of accounts, trimmed lending limits and slashed rewards. Lenders are also raising fees and interest rates ahead of a new law that increases protection for consumers. The law is expected to shrink the industry and limit subprime borrowers' access to plastic money.
The worse-than-expected August numbers supported the contention of some analysts that the July decline in defaults was due more to seasonal effects, like tax refunds, than an improvement in consumers' financial health. Looking at August employment numbers, I expect bad-loan levels will keep rising until later this year or early 2010.
