Brown on Business

September 14-20, 2020

Despite foreboding economic winds, American consumers adapt financially to new COVID-19 reality

By Wesley Brown
wesley@dailydata.com

Regardless of who wins the highly anticipated November presidential election, the current Republican-led administration or a new Democrat White House occupant is going to have to deal with the consequences for many years ahead or even decades.

Not only are American taxpayers being asked to carry the burden of future deficits, millions of consumers will also have to play catch up on past due mortgage payments, debt and other obligations now under local, state and federal moratoriums that have been extended into 2021.

Concerning the nation’s growing deficit, the Congressional Budget Office (CBO) on Sept. 2 projected a federal budget deficit of $3.3 trillion in 2020, more than triple the shortfall recorded in 2019. That increase is mostly the result of the economic disruption caused by the 2020 coronavirus pandemic and the enactment of the $2.2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act and other emergency legislation in response. 

At 16% of gross domestic product (GDP), the estimated deficit for the federal fiscal year 2020 that ends on Sept. 30 would be the largest since 1945. Going forward, the deficit in 2021 is projected to be 8.6%, more than four times the annual average GDP growth of 2.1% ahead of the pandemic in 2019. Between 1946 and 2019, the deficit as a share of GDP has been larger than that only twice. 

In CBO’s projections, annual deficits relative to the size of the economy will generally continue to decline through 2027 before increasing again in the last few years of the projection period, reaching 5.3% of GDP in 2030. They exceed their 50-year average of 3% in each year through 2030.

On top of is the growing federal debt held by the public, which is the accumulation of annual deficits, minus surpluses. In recent weeks, the CBO upgraded projections for U.S. debt to spike by 98% of GDP in 2020 compared to 79%in 2019 and 35% in 2007, a year before the Great Recession and the nation’s last downturn. That debt load, which now stands at about $26.8 trillion, would exceed 100% in 2021 and rise to 107% in 2023, the highest in the nation’s history. The previous peak occurred in 1946 following the large deficits incurred during World War II.

Despite the ominous predictions of out-of-control debt that could burden the U.S. economy for generations, most economists agree that the current COVID-19 government spending spree has likely kept the U.S. from sliding into downturn that would dwarf the Great Depression in size and length. But maybe the best news over the past several months has been how the U.S. consumer has responded to the economic “new norm.” 

For example, in the New York Federal Reserve Bank’s quarterly report on U.S. household debt and credit published on Aug. 6, total household debt decreased by $34 billion (0.2%) to $14.27 trillion in second quarter of 2020. This marks the first decline since the second quarter of 2014 and is the largest decline since the second quarter of 2013. 

The report, which is a sampling of individual- and household-level debt and credit records drawn from anonymized Equifax credit data, reflects consumer credit data through the first half of 2020. That random snapshot takes in the first three months of the pandemic when all 50 states shutdown their economies with shelter-in-place and social distancing order.

The Fed report noted that mortgages, the largest component of household debt, rose by $63 billion in the second quarter to $9.78 trillion as interest neared historic lows. Mortgage originations, which include mortgage refinances, reached $846 billion, the highest volume seen since the refinance boom in 2013. Origination credit scores for mortgages increased notably in the second quarter of 2020.

Reflecting the sharp decline in overall consumer spending due to the COVID-19 pandemic and related social distancing orders, credit card balances fell sharply by $76 billion in the second quarter. This was the steepest decline in card balances seen in the history of the data. Auto and student loan balances were roughly flat in the second quarter. In total, non-housing balances (including credit card, auto loan, student loan, and other debts) saw the largest drop in the history of this report, with an $86 billion decline.

Altogether, credit card delinquency rates also dropped markedly in the second quarter, reflecting increased uptake of forbearances, which were provided by the CARES Act. The share of mortgages in early delinquency that transitioned ‘to current’ rose to 61.1%, while there was a decline in the share of mortgages in early delinquency whose status worsened during Q2 2020. 

Like mortgages, credit cards, student and auto loans also showed lower transition rates into delinquency, likely reflecting the impact of government stimulus programs and various forbearance options for troubled borrowers. Approximately 7% of aggregate student debt was 90-plus days delinquent or in default in second quarter, compared to 10.8 % a year ago. The sharp decline in student debt delinquency reflects a Department of Education decision to automatically qualify all federal student loans for CARES Act forbearances and report their status as current.

“Protections afforded to American consumers through the CARES Act have prevented large-scale delinquency from appearing on credit reports and damaging future credit access,” said Joelle Scally, administrator of the New York Fed’s Center for Microeconomic Data. “However, these temporary relief measures may also mask the very real financial challenges that Americans may be experiencing as a result of the COVID-19 pandemic and the subsequent economic slowdown.”

Scalley’s warning highlights the delicate balance of steering the world’s largest economy through the COVID-19 pandemic, which still is seeking a cure that could still be several months or years away. Still, the American consumers have lifted the U.S. economy out of the Sept. 11 crisis in 2001 and a near fatal subprime meltdown and banking crisis in 2008.

Similarly, Transunion, one of the other three national credit reporting agencies along with Experian and Equifax, also noted recently that Americans are facing challenging economic times, but said in the first quarter that it was too early to tell the long-term implications of this pandemic for the credit markets. 

In the credit reporting giant’s second quarter report on auto, credit card, mortgages and personal loans in the consumer market, Transunion found that found the total percentage of accounts in “financial hardship” status dropped during the month of July. 

“Overall the consumer credit market has been performing quite well despite the obvious challenges brought on by the COVID-19 pandemic,” said Matt Komos, vice president of research and consulting at TransUnion. “It’s a reassuring sign that delinquency levels have remained relatively low – especially as the percentage of consumers in financial hardship status has started to decline. While we still expect to see future delinquencies rise based on macroeconomic factors, it is clear that government stimulus programs and accommodation programs provided by lenders are helping the market withstand these challenges in the near-term.”

Komos assessment is not only good news for the U.S. financial markets but highlights the long-held belief that the strength of the U.S. economy is the American consumer.