The Economy is Bad, But is it 'Double-Dip' Bad?

Mike Ginsberg

Yesterday, insideARM Senior Editor Patrick Lunsford opined that the US economy may be heading for a “double dip” recession.  While it is not all grim on the economic front, recovery managers and ARM professionals need to pay attention and react accordingly.  Read on and let the debate begin.

No one can dispute the abysmal Q2 economic results being reported this week:

1. U.S. housing market has fallen into a “double-dip” decline in prices. The market values of residential properties have returned to where they stood in 2002, lowest level in a decade.
2. Manufacturing activity in the upper-Midwest unexpected dropped to its lowest level since November 2009
3. The consumer confidence index in May showed its lowest rating in six months
4. Economists are downgrading their second quarter growth predictions
5. Companies are similarly cautious, predicting weak sales and negative effects from the disaster in Japan

Add to this outlook that since the recession “officially” ended in mid-2009, annual economic growth has run no better than the recovery after the 2001 recession and far worse than the 1982 recession.  The economy could face more challenges ahead as the Fed scales back its stimulus efforts, state and local government cut spending to combat budget constraints and Congress looks to cut federal spending next year.

But some areas of the economy are actually showing signs of improvement.  Job growth has improved in recent months, which has direct impact on recovery efforts, and export demand has improved, feeding off expanding emerging markets.  It will take sustained job gains and economic improvement to inspire households to spend more and increase overall confidence levels, critical to sustained improvements in recovery levels.

Lunsford noted that recovery rates have been paltry and he stated that’s not going to change anytime soon.  I completely agree with this sentiment.  Recovery managers absolutely need to factor this into their decisions to cut vendors and/or reduce fee rates.  I know for a fact that some are citing improved liquidation results as they cut rates, which is very short-sighted in my opinion.

Lunsford went on to say that ARM firms have also been comfortable in the knowledge that their supply of work (defaulted credit accounts) has been strong.  I respectfully disagree with this statement.  Placement levels in the credit card sector have dropped significantly over recent quarters as loan originations remain down and issuers have cut back their agency networks and decreased placement volumes to external agencies.

Note: some top collection agency performers who are staying clear of the headlines (which is a different topic but critically important) are actually experiencing increases in placement volumes even though loan originations remain down but this mostly exists among third party placement volumes.

Lunsford concludes that we could see a market where both account forwarding and liquidation rates are depressed and he’s not sure we’ve seen that before.  In the two decades that Kaulkin Ginsberg has tracked the ARM industry, we have not seen simultaneous reductions in placement volumes and liquidation rates.  Typically during a recession, placement volumes actually increase while liquation performance drops.  As the economy improves, so does liquidation performance with above norm placement volumes.  During this prolonged economic setback, both have run concurrent which has forced recovery managers and collection agencies to adjust their recovery efforts and scale back operations accordingly.

What are you seeing in your operation?  It is time to speak up.  Drop me a line or call me to discuss.

Mike Ginsberg is President and CEO of ARM advisory firm Kaulkin Ginsberg, and can be reached by email. The firm is celebrating its 20-year anniversary in the ARM market.