A “dead cat bounce” metaphor is used in the investment trade. In short, it supposes that “even a dead cat will bounce if it is dropped from high enough.” According to Investopedia, a dead cat bounce indicates that a downward trend, now on the upswing, could be deceiving. Inevitably, the short-term gain is misleading because it is temporary. What does this mean for credit card managers?
Credit card managers must use internal data to plan revenue and credit card risk models for 2023. Still, they also must consider other factors, such as inflation rates, interest rates, and employment levels. Everyone knows that inflation rates are at unacceptable levels and three times the Federal Reserve’s target rates. Interest rates are the central banks’ line of defense against inflation and are on the rise faster than in any other period in the last decade.
As the recession becomes inevitable, the expectation is that the unemployment rate, which ended at 3.5% in July 2022 (the lowest since February 2020), would begin to climb.
The latest jobs report indicates that employment rates improved in July, though the New York Times headlines with the phrase “Unexpectedly Soared.” The day’s question is whether the improvement means a recession has come and gone or is the metric doing a dead cat bounce, meaning the read is an anomaly.
According to the NYT analysis of the Bureau of Labor Statistics, 528,000 jobs grew in July, ending a trend that began in March after the monthly number of job gains fell from 700,000 to 400,000. Says the New York Times:
- U.S. employers added 528,000 jobs in July, the Labor Department said on Friday, an unexpectedly strong gain that shows the labor market is withstanding the economic impact of higher interest rates, at least so far.
- The impressive performance — which brings total employment back to its level of February 2020, just before the pandemic lockdowns — provides new evidence that the United States has not entered a recession.
- Bleak readings on consumer sentiment in recent months, along with fears that a recession lay ahead or had even begun, were “completely at odds with the reality of what the underlying data was telling us,” according to Justin Wolfers, a University of Michigan economist. “I’ve never seen a disjunction between the data and the general vibe quite as large as I saw.”
Jobs are up, which is good, but how long will it last? It would not seem awfully long when you look at which job sectors gained. Unfortunately, construction jobs and manufacturing jobs fell the most. Education, health, and business services were on par with the average, but the most significant gain was in leisure and hospitality.
Credit Card Policy Managers Take Note
Here we are in a hot August, but the summer fun will end in 31 days when Labor Day rolls around. Those gains in leisure will be off.
The takeaway is that you do not think the reported job increase is a positive indicator in your forecast models. Yes, everyone likes a good jobs report. But with the gain coming from leisure and hospitality during the summer months and not from construction and manufacturing, the win is less significant.
The recession is on its way. It is a suitable time to temper lending and rebuild the collection function at credit card issuers.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group