Recent research has linked macroeconomic shocks with household financial distress. For instance, José Mustre-del-Río, Juan M. Sánchez, Ryan Mather, and Kartik Athreya show that regions with a higher share of credit card delinquency had more severe responses to macroeconomic shocks during the past two recessions. This post takes the topic a step further by exploring whether delinquency rates for households and businesses can help anticipate recessions.

We use delinquency rates on business loans and credit card loans for all banks, published by the Board of Governors of the Federal Reserve System, to represent financial distress. Delinquency rates are calculated as the ratio of the dollar amount of delinquent loans to the dollar amount of all loans outstanding.

In the FRED graph above,

• the orange dashed line shows delinquency rates for business loans, i.e., the financial conditions of businesses;
• the blue solid line shows delinquency rates for credit card loans, i.e., the financial conditions of consumers and households;
• and the shaded areas indicate recessions.

The overall pattern: Delinquency rates substantially increased around the 1990-1991, 2001, and 2008-2009 recessions, peaking at the end of each recession. More importantly, these rates began rising several quarters before the recessions started.

The business loan delinquency rate associated with the 2008-2009 recession began increasing in the fourth quarter of 2006 and continued for five consecutive quarters before the recession began. The rate associated with the 2001 recession behaved similarly, rising in the fourth quarter of 1999 and continuing to rise for six consecutive quarters until the recession started. Business loan delinquency also signaled the 1990-1991 recession, with rates rising for three consecutive quarters prior to the recession.

The credit card loan delinquency rate exhibited similar cyclical patterns: It began rising a few quarters before the recessions and peaked toward the end of each downturn. Before the 2008-2009 recession, it began increasing in the fourth quarter of 2005. Before the 2001 recession, it began increasing in the first quarter of 2000.

It’s important to emphasize that delinquency rates can rise without a recession occurring in the next year (false positives). In 2016, for instance, business loan delinquency rose, but a recession didn’t occur until 2020. From 1994 to 1996, credit card loan delinquency rose, but a recession didn’t occur until 2001.

What can we learn from this? The FRED graph suggests that delinquency rates may provide insights into future conditions for the US economy. But, since they also produce false positives, they should be considered alongside other indicators to anticipate recessions as accurately as possible.

How this graph was created: Search FRED for “Delinquency Rate on Business Loans, All Commercial Banks.” Next, click on the “Edit Graph” button and select the “Add Line” tab. Search for “Delinquency Rate on Credit Card Loans, All Commercial Banks” and click on “Add data series.” Last, use the “Format” tab to select “Graph type: Line.”

Suggested by Masataka Mori and Juan M. Sánchez.