Mike Ginsberg, president & CEO of Kaulkin Ginsberg Company, was quoted in a recent article featured in Collector magazine, written by managing editor Anne Rosso May.
When the economy tanks, there are some industries that continue to thrive—or at least stay in the black. The alcohol, accounting and funeral services industries come to mind. Accounts receivable management (ARM), however, is not on that list—despite some of the headlines we saw insisting otherwise during the Great Recession, Collector magazine managing editor Anne Rosso May reports in the June issue.
We’re currently in the second-longest economic expansion in U.S. history—but the good times probably won’t last forever, and many experts say they are starting to see signs that a recession is on its way.
Among them are rising levels of consumer debt and the interest rate spread between short-term federal funds and long-term U.S. bonds, which inverted twice already in 2019. (Historically, an inverted yield curve has been a reliable predictor of U.S. recessions.)
That said, opinions on when a downturn will arrive vary. While S&P Global, a government ratings agency, recently raised its probability of a 2019 U.S. recession to 20-25 percent, Matt Komos, vice president of research and consulting for TransUnion, believes we won’t see a significant downturn arrive this year, Rosso May reports.
“A lot of what we see in the economy helps drive the consumer credit market, and recent trends in unemployment, wages, inflation, GDP growth and income have all helped bolster the consumer credit marketplace,” Komos said. “Based on what we saw in 2018 and what’s projected for the next year or so from an economic standpoint, I anticipate the consumer credit market will continue to do well through 2019.”
Michael Lamm, managing partner at Corporate Advisory Solutions LLC, said that he sees more of a looming correction than a recession, thanks to conflicting economic trends: student loan and credit card debt amounts are close to exceeding pre-Great Recession levels, for instance, but jobs are holding steady and the economy is growing.
“A lot of people assume this industry is recession-proof, when it’s actually anything but that,” Lamm said. “What it is, though, is an indicator for a looming recession. You’ll start to see more and more placements or defaults as we’re going into a market correction. When you look at the market now, you’re starting to see those cracks. The unknown at this point is what’s going to be the catalyst that’s going to tip the market.”
The Impact of a Recession
The Great Recession stretched from December 2007 to June 2009, according to the National Bureau of Economic Research. Mike Ginsberg, president and CEO of Kaulkin Ginsberg, believes it was the most pervasive and impactful recession in the history of the ARM industry, which he considers truly getting established in the 1940s (i.e., after World War II and the advent of credit).
“The impact of the Great Recession punched this industry square in the mouth,” Ginsberg said, “all facets of it: collections, debt buyers, collection law firms, vendors and creditors.”
For consumers, unemployment and default rates went up; for debt collectors, revenue and liquidation rates went down as consumers’ propensity to pay fell off a cliff. The collapse of the financial services markets also knocked out agencies that relied solely on the business generated by those clients.
During that time, many ARM companies shut down or were absorbed by larger operations, and agencies that managed to weather the storm may have found their efforts undone by intense regulatory compliance challenges that sprang up just a few years later.
The ARM landscape, which had approximately 7,500 collection agencies (including debt buyers and law firms) before the recession, now has closer to 3,500, Lamm said. And from 2006 to 2016, the number of collection jobs declined, according to data from the Bureau of Labor Statistics, despite an initial 23 percent growth projection for that time period.
The collapse of the housing market in 2008 also shifted the consumer profile, impacting how collection agencies approached delinquent debt and how consumers paid it.
While many ARM companies were anticipating market changes of some kind, most didn’t predict the magnitude of the Great Recession. Fortunately, while there has been a lot of talk about the student loan and auto “bubbles” today, industry experts don’t think we’ll see anything like the Great Recession this time around.
However, Heidi Pozzo, founder of Pozzo Consulting and author of Leading the High-Performing Company, says now is the time to start preparing for the next downturn/correction/recession.
“It’s too late if you wait until you are in a recession because the business won’t have the flexibility to adjust quickly,” Pozzo said.