Is The Post Pandemic US Recovery Sputtering?

Now that the vaccines for the deadly Covid-19 virus are in place, there is expected relief all over. The big question in the minds of most is how quickly will America get back on its feet? This is a fair questions, but the answers may not be straight forward. At least if we go by extant data.

 

Two important data published recently may provide us some insights on the recovery.  It is worth examining them in a bit of detail.

 

Firstly, data published by the Federal Reserve (December 21^st 2020) from the findings in the Survey of Consumer Expectations (SCE) Credit Access Survey ¹ points to some key consumer behavior patterns that may impact recovery of US economy.

 

While the overall credit outstanding ( borrowings) remained steady, revolving balances declined by $5.5 billion. It is worth noting however, that the decline in revolving balances had started much earlier – in Q2 of 2020 with the onset of the pandemic.² The decline was broad-based across various sections of society.

 

The second piece of data that is of interest is the US savings rate issued by the US Bureau of Economic Affairs (BEA).  The BEA defines personal saving rate as personal saving as a percentage of disposable personal income. In other words, it's the percentage of people's incomes left after they pay taxes and spend money.

 

US savings rate was at a high of 12.9%, down from a never before seen high of  33.7% in April 2020. This has been attributed to lockdown of the economy which forced people to save. 

The high savings rate definitely holds out hope of a hyper recovery. Given their proclivity to spend and live for the day rather than save for the uncertain future, Americans are more likely to splurge the savings at the first opportunity. This may figuratively be the equivalent of the bursting of reservoir or a dam, and could come with all attendant benefits as well as collateral damages. Having said that, the thinning of savings rate will largely be dependent of resumption of business and complete end of lockdowns.

 

However, we must be alert to the fact that this also hides a dramatic polarization of economic fortunes among Americans that we witness today. The truth is that the lucky ones with jobs have garnered higher savings and consequent increase in wealth while the unemployed continue to face hardships.³ 

 

The moot question then is what are the insights that these key data items offer us vis-a-vis the US economic recovery?

 

The decline in borrowings may be good news for the borrowers, but is definitely a bitter pill for the banks. This is because lower loan balances and fewer new accounts (loans , credit cards etc.) mean lower profits and could impact the bottom line of banks as early as H2 of 2021.

 

Further, as is well known, consumer spending is the engine of the US economy. If savings rate stay stagnant at these level or decrease at a slower pace , it could adversely impact consumer spending. Lower consumer spend , as a consequence of lockdown 2.0, will continue to put pressure on key economic sectors like restaurants, hospitality, travel and other related segments at are already enervated.

 

While US unemployment rate at 6.7% is indeed welcome news, it does not in any way mitigate the wealth inequalities or the hardships that the pandemic had already wreaked and continues to heap on the unemployed.⁴  The pall of gloom over these sections may continue well into 2021, even after they are gainfully employed.

 

Certainly, data cited above proffers mixed signals and may point to a turbulent recovery at the very minimum. While the availability of vaccines and inoculation of large sections of society will certainly improve the public health scenario and open up America sooner, it may not be a guarantee for business as usual.

 

 

The pandemic would still have left its indelible impressions, creating fissures via unprecedented income inequalities in a society that has already been scarred and deeply polarized by politics, race and massive economic divide.

 

A sputtered recovery can have a domino effect on the world economy at large. From trade to respective bilateral relations there could be tensions all because the pandemic left the world economy in tatters.

 

That brings the focus on the stimulus 2.0. The stimulus has be substantive and catalyze the bridging of the economic divide that prevails in the US today. That presupposes Congress will put a united foot forward and keep the nation’s interest first, rather than expedient political gains.

Both the Republicans and the Democrats have an incumbent duty to see this happen. The cost of failure could be a missed opportunity to resuscitate the US economy.

 

The data is what it is but its interpretations are subjective. It is for the political leadership to act with agility to bridge the economic chasm and jumpstart  an effete economy.  For their part the rest of the world will watch as bystanders hoping that the US rebounds and offer their economies a fighting chance to recover from the devastation of the pandemic.

 

 

 

References

1.       Credit Access Survey Shows Plunge in Credit Demand and Access - FEDERAL RESERVE BANK of NEW YORK (newyorkfed.org)

2.       Consumer Loans: Credit Cards and Other Revolving Plans, All Commercial Banks (CCLACBW027SBOG) | FRED | St. Louis Fed

3.       The Pandemic Has Resulted in Record U.S. Savings Rates, but Only for Some

4.       The Employment Situation — NOVEMBER 2020 (bls.gov)

 

 

#USEconomy #Pandemic #Recovery #ConsumerCredit 

Can Banking sector hasten US economic recovery?

 

The US Bureau of Economic Analysis (BEA) published data (September 30^th, 2020) that put a number to the economic devastation caused by the Covid pandemic. The real gross domestic product (GDP) decreased at an unprecedented annual rate of 31.4% in the second quarter of 2020. As expected, the shrinkage was bought about by decreases in key industry segments - accommodation and food services (-88.4%), healthcare and social assistance (-48.1%), durable goods (-43.3%). The Finance and Insurance sector, on the other hand, was in positive territory - contributing a growth of 11.9% nationally.

This perilous shrinking of the GDP may mean continued hardships over the foreseeable future. A second wave of the pandemic, like the one now raging in Europe, can only deteriorate and complicate the recovery process further. There may be no parallels in the history where survival, recovery and growth of the US economy and consequently, the global economy at large are tied solely to the invention of a vaccine for a pandemic.

Nevertheless, the data does have some silver linings. Unlike the recession of 2008, this time around, the financial services sector has displayed vigor, largely driven by mature consumer behavior. For example, many who are eligible for forbearance have instead chosen to pay down their balances.

The resilience of the banking industry in particular largely stems from three key factors. 

Firstly, consumers have displayed a strong willingness and ability to meet their debt obligations despite severe health and economic hardships wrought by the pandemic. This trend to pay down the debt, it must be noted, was observed even before COVID, in Q1 of 2020.

The US Federal Reserve report (October 2020) shows that consumer debt dropped significantly in Q2 2020. US consumers have cut back on their revolving debt significantly. 

Credit card balances have continued to fall during the last six months.  In the month of August, total outstanding fell by US$ 7.2 billion. During the same period, however, auto and student loan rose by US$2.2 billion. The Overall, consumer debt in August, decreased at a seasonally adjusted annual rate of 2 percent.

Secondly, the federal stimulus payments have been a big help to consumers. They have used the money judiciously to buy essentials as well as pay down their debt. This behavior is significant since it has helped banks reduce their delinquencies and consequent charge offs and enable faster recovery in a post pandemic world. A second round of stimulus payments, as and when it comes, will only strengthen the consumer’s hands in meeting payment obligations.

Thirdly, banking consumers have switched channels in a big way. While the pandemic has reduced foot traffic to branches, it has boosted usage of digital (online/ mobile) channels. The uptick in traffic had even created outages at several leading banks. According to Fidelity National Information Services (FIS), there was a 200% jump in new mobile banking registrations in early April, while mobile banking traffic rose 85% (CNBC 5/27/2020).

This channel switch may be the biggest blessing for banks by not only keeping the industry afloat, but also may have actually ushered in a sustainable digital banking paradigm in a post Covid world.

All these have contributed to the strong performance of the Banking sector in Q2 despite the pandemic. Given the new dynamics, particularly the strong consumer payment behavior, it may be time for banks to reassess their tight lending policy. There may be a window of opportunity to get back to the business of lending to responsible customers.

If banks can jumpstart the lending process, albeit in a responsible manner, it may provide a beacon of hope for the overall recovery process. While it is too soon to predict a full recovery, the banking sector may be able and ready to catalyze a recovery America is eagerly waiting for.

Are US Banks on road to recovery?

With more than 38 million unemployed and the economy shrinking by 4.8% (per the US BEA data), the impact of the COVID-19 pandemic on the US has been unprecedented.

Even as the death toll crossed a psychological landmark of 100,000 many businesses across the US are planning a phased reopening, albeit with adequate precautions. 

However, this may hardly bring cheer to the banking and financial services industry that is facing a bleak H2 this year.

The high unemployment caused by the pandemic has imposed hardships on Americans and many will find it difficult to meet their financial obligations, despite the forbearance that lenders have provided them. The result will be a sharp rise in delinquencies and charge offs across lending products.

Further, the high expected losses will also force banks to apportion higher capital reserves against losses.

According to a recent McKinsey study, the expected losses to the retail lending business in the US in the short term (three to six months) could be between $15 -$25 billion. If unemployment hits 20%, the longer term losses could be over $150 billion over the next two years.

It is difficult to imagine such a huge loss staring at the retail banking industry. Whether this actually pans out or not will largely depend on how robustness of the recovery of the US economy and to some degree on how smartly lending institutions manage their credit risk policy during these turbulent times.

But all is not lost. There may be a silver lining that cannot be ignored. Available data points to an otherwise healthy economy prior to the pandemic.  Data published by the Federal Reserve Bank of New York (May 2020) shows that non housing debt at the end of Q1 2020 was flat, punctuated by a seasonal decline in credit card debt of $34 billion. This drop was significantly larger than the decline for the same period in 2019.

Obviously the data published by the Federal Reserve does not incorporate the impact of COVID-19 on the economy. But the point to note here is that as at the end of Q1 2020, there were no major concerns with respect to consumer debt.

The insight here is that if the US can manage an orderly reopening of the economy and reign in unemployment, even if slowly, there is every chance that the economy will recover faster than many are forecasting. That would be good news for the banking and financial services industry.