December 5, 2008
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News: Future Woes from Unemployment & Low Pay.
The worst of the unemployment flood is just begun. Respected forecasts have had to be re-figured on how bad it's going to get. The former projections were targeted at 6.5%. As if that wasn't devastating enough, the new figure is a rise to 8.7% which won't subside before 2010. Over half a million more jobs were lost just last month (November). These indices may mean little to the casual observer but, consider how much just a 1% rise point effects our economy. Just a 1% rise in unemployment can increase losses of mortgage-pools (bundling) securities another 35%. Mortgage default indices are found to parallel unemployment indices very closely. Mortgage delinquency is driven by job loss factors. What about credit cards? JP Morgan Chase & Co., our largest credit card lender, by some standards, had to file a devastating net income drop of 85% for this last quarter (3rd quarter). This credit card connection was attributed to rising unemployment.
It's much the same with the other major credit card issuers. Rising unemployment had hammered Citigroup with a $2.81 billion loss for last quarter (3rd quarter). American Express isn't faring much better. Due to rising unemployment, they've had to set aside another 51% more in security protection because of defaults and their stocks have dropped around 59%. Shares for Discover are down 30% and shares for Capital One are down 32%. Across the board, the credit card industry is suffering slashed earning estimates due to lack of confidence over rising unemployment.
With an 18-21 month recession still worsening, we may be looking at the longest ever. Borrowers no longer have the luxury of falling back on their home values or living day to day on credit cards. The foreseeable forecast is a deepening financial slump. Borrowers will now have to rely on their paychecks to pay their bills. The initial default risk wrought by souring non-prime home loans, is now being overshadowed by an even more formidable risk. That is, the danger of borrowers defaulting when they lose their jobs. The pressure is on.