Quarterly Consumer Loan Charge-Off Rate Prediction

The Federal Reserve Bank will soon report the Consumer Loan Charge-off Rate (CLCOR) for the fourth quarter of 2020. According to the data published on Nov 20^th 2020, the total seasonally adjusted CLCOR figure for the 2020Q3 was 1.92% (17% lower than 2020Q2 figure, 2.31%). This sharp decrease happened both in the case of credit cards and other consumer loans. However, the fall was sharper in the case of other consumer loans, as seen below:

SOURCE: https://fred.stlouisfed.org/graph/?g=B6Fn

The charge-off rate for other consumer loans dropped from 0.92% in 2020Q2 to 0.56% in 2020Q3. The forbearance programs and relief packages could be one of the factors contributing to this pattern. Although lower charge-off and delinquency rates generally should signal a healthier economy, we’ll need to wait and monitor these signals to see how they react once the forbearance programs are over.

Our previous prediction for 2020Q3 was 2.42%. And, since the model did not consider for any government interventions, the previous predicted value presented an error of 26%. The current, most recent prediction for the upcoming report for 2020Q4 is 2.28%. However, looking at the delinquency rates from the previous quarter we expect to see a rate around 1.92% again or lower for 2020Q4.

Here are the predictions for the next four coming quarters (without the correction for government intervention):

Although the model does not take into account government intervention, the overall prediction for the upcoming quarters is lower than that from the previous round of our forecast just because the most recent reported value was below the generally expected level by a large margin. Thus, the effect of that observation alone pulled down our upcoming forecast. All that said, as was mentioned earlier, we expect that the upcoming figure for 2020Q4 should be even lower than our average estimate of 2.16%.

Below, you can see the performance of our predictions against the actual values since 2015Q4, which is when we started predicting CLCOR on a regular basis.