The past quarter-century was fun for American consumers. But after all that borrowing and spending, they've rediscovered thrift and prudence. This is good news for personal balance sheets but bad news for credit card companies.
Fitch Ratings recently forecast that earnings of U.S. credit card issuers will continue suffering because of the lousy labor market, bankruptcies and bad loans.
The report, summarized here by Zacks Equity Research, details how the major credit card issuers were dealing with losses as the nation's unemployment rate hurdled above 10%.
"Also, as it is expected that the (unemployment) rate will remain above 10% through 2010 (and that) consumers will increasingly fall behind on payments," Zacks said. "As a result, the losses of the credit card issuers could worsen further."
Fitch's rating outlooks are negative on the less-diversified credit card companies, which are at risk of a downgrade by the agency. The Fitch hit list includes Capital One Financial (COF, news, msgs), American Express (AXP, news, msgs) and Discover Financial Services (DFS, news, msgs).
According to Fitch, prime credit card delinquencies of 60 days or more climbed 16 basis points to 4.22% in October, and the rating agency forecasts higher loss rates in 2010.
Additionally, more trouble for these companies is coming in the form of the Credit Card Accountability, Responsibility and Disclosure Act, signed by President Barack Obama in May.
Video: 3 reasons credit cards beat debit cards
From the card companies' perspective, key components of the act include an inability to raise rates on existing card balances, a requirement to maintain promotional rates for at least six months and a restriction on fees for subprime, low-limit cards. Most of the new requirements will take effect in February.
At the same time, write the analysts at Zacks, consumers have been transitioning from credit cards to debit cards. So the credit card companies don't have much room for improvement until the economy starts to enjoy a sustainable recovery.
But there are more than just near-term speed bumps. Strategists say the companies are getting squeezed, and that's a headwind they could face for some time.
More from MSN Money and Minyanville
But the go-go years came to a screeching halt as unemployment spiked higher. The unemployment rate jumped to 10.2% in October from 9.8% in September and is now just 60 basis points shy of the post-World War II high of 10.8%.
When will the unemployment picture begin to brighten?
According to our central bankers, we shouldn't hold our collective breath.
Janet Yellen, president of the Federal Reserve Bank of San Francisco, recently said that "unemployment could well stay high for several years to come . . . (and) our recovery is likely to feel like something well short of good times."
Her colleague Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, didn't sound much more optimistic when he recently said he expects to see "very slow net job gains . . . sometime next year."
Given that backdrop, it's thoroughly unsurprising that you and your neighbors are more interested in saving than in spending. Nothing captures that shift more clearly than the contraction in consumer debt.
In September, total consumer credit fell $14.8 billion, making it the eighth month in a row of debt repayment. Economists say this is an unprecedented string of declines.
Investment strategist Gary Shilling recently told his clients he would steer far and wide of credit card companies.
"Recent developments are virtually all negative for the credit card business now and for years to come," Shilling wrote in his most recent research note. "With the switch from a quarter-century consumer borrowing-and-spending binge to a long run saving spree, the credit card business has moved from a growth industry to a laggard."
This article was reported by Josh Lipton for Minyanville.
Rate this Article
High
I'm just all teary-eyed because of all the suffering they are experiencing.