Quarterly Consumer Loan Charge-Off Rate Prediction

This is our 17th, quarterly post on predicting the consumer loan charge-off rate

The Federal Reserve Bank will soon report the Consumer Loan Charge-off Rate (CLCOR) for the second quarter of 2020. According to the data published on Jun 15^th 2020, the total seasonally adjusted CLCOR figure for the 2020Q1 was 2.30%. The most recent prediction for the upcoming report for 2020Q2 is 2.23%.

Here are the predictions for the next four coming quarters:

In our most recent charge-off post in May, we theorized that CLCOR could hit 3.17% by the close of 2020. However, we have since amended that estimate down to 2.89% for several reasons:

It seems that the stimulus programs have worked fine so far in terms of helping the consumers in need.
Although America was in lockdown in the first half of the second quarter, the employment started to recover and not much negative sentiment was observed regarding consumer debt.
In fact, US retail sales are back up to their pre-pandemic levels. It should be mentioned that the purchase patterns are different from what they looked like in pre-pandemic era. But nonetheless, it is a good sign that consumers can still spend at the level of pre-pandemic time.

The following figure shows the historical trend of CLCOR and the forecast values obtained from LM (Linear Model) and ECM (Error Correction Model) for the next four quarters. The ECM is our model of choice for this task.