By Juan M. Sanchez, Senior Economist, and Lijun Zhu, Technical Research Associate
It is well known that labor markets have been improving slowly but steadily since the end of the recession. A similar trend, perhaps less noticed, is observed in delinquent loans (those past due 30 days or more and still accruing interest as well as those in nonaccrual status) measured as a percentage of end-of-period loans, or the delinquency rate.
The figure below presents the delinquency rate from the first quarter of 1991 (when data became available) through the second quarter of 2014. During the Great Recession, the delinquency rate reached a record high of almost 7 percent. Since 2010, however, it has decreased continuously, reaching its prerecession level in the third quarter of 2010 and its historical low of 2.3 percent in the second quarter of 2014, the latest available data period.
Delinquencies on credit card loans usually occurs when households suffer from unfavorable economic shocks such as unemployment. Since the incidence of those shocks increases during recessions, the delinquency rate on credit card loans shown above increases during recessions (which are signified by the chart’s shaded areas). Thus, a natural candidate to account for the declining trend in the delinquency rate is the improvement in labor markets.
However, since the labor market was arguably better in 2004-06 when the delinquency rate was significantly higher than today, there must be another reason for the current record low rate. The deleveraging of U.S. households since the start of the recession is probably part of the answer . While the mean credit card balance of all U.S. households at the beginning of the recession was $3,538, it was only $2,791 (21 percent) at the end of it.