ABA Economic Analysis
VSConsumer delinquencies were brought under control throughout 2020 during the pandemic-induced recession. As reported in the ABA’s Consumer Credit Delinquency Bulletin, defaults remain well below levels seen during and after the 2008-09 recession, although they have increased in some sectors, particularly card accounts. banking. Overall, defaults represented 1.63% of loan balances in the first quarter of 2021, down 61 basis points from a year ago. For most types of closed credit (such as personal, auto, mobile home, home equity and home improvement loans), late payments continued to decline in the first quarter.
As shown in Figure 1, the Federal Reserve Bank of New York also found that default rates declined for most categories of consumer loans after the economic downturn, especially for student loans and mortgages. Similar to the ABA’s findings, the New York Fed found that credit card defaults increased in the first quarter of 2021; from the last quarter of 2019 to the first quarter of 2021, delinquencies fell by 45% for mortgages, 3% for auto loans and 44% for student loans.
Why have delinquencies stayed so low during the recession?
The low levels of delinquency during the current recession stand out from the sharp increases in previous economic downturns which have remained high during recoveries. This time around, three major factors have kept delinquencies low: a sharp reduction in consumer spending, historic levels of fiscal stimulus and other federal aid measures, and support for the banking sector. Together, these factors have improved the financial situation of consumers, even as they faced a historic decline in business activity and rising unemployment.
Reduction in consumer spending. At the start of the pandemic, consumer spending plummeted as businesses closed and mobility was drastically reduced. Personal consumption expenditure, which normally increases steadily, fell by more than 16% from April 2020 to April 2021. Even during the 2008-2009 recession, the worst since the Great Depression, the PCE has never fallen by more than 3% year-on-year. .
The sharp drop in spending translated into a significant drop in credit card debt in 2020, accounting for just 4.7% of disposable income in the fourth quarter of 2020 (compared to nearly 5.4% in the first quarter). At the same time, total revolving credit fell by more than 10% ($ 116 billion) from January 2020 to May 2021 (see Figure 2).
Federal support measures. In response to the economic shutdown, the federal government moved quickly to support consumers and businesses through fiscal stimulus. Starting with a series of three relief bills passed at the start of the downturn (the most important of which was the CARES Act), Congress and the Trump and Biden administrations implemented a myriad of additional measures throughout the pandemic to mitigate the economic fallout. These bills have broadened and expanded unemployment insurance, provided assistance to small businesses, offered lifelines to key industries particularly vulnerable to the pandemic, bolstered state finances, and sent out several thousand dollars in payments. direct to most Americans. Combined with lower spending levels, these policy measures have allowed consumers to focus on paying down their debts. Indeed, the Census Bureau Household Pulse Survey found that nearly 50 percent of people who received the third stimulus payment used the money to pay off their debt. Non-financial aids, such as moratoriums on evictions and foreclosures, have also kept people in their homes and helped ease the burden of monthly bills for many consumers.
Help from banks. Banks have played an important role in keeping consumers afloat during the recession. US banks have supported consumers by removing late fees, postponing loan payments and lowering interest rates. Most importantly, banks have been able to support consumers while protecting their balance sheets against further economic changes. According to the Federal Reserve’s most recent stress tests, banks are well-capitalized, with capital ratios double the minimum required level, even in the worst-case scenario. Based on this evidence, Fed officials believe the banking system is well positioned to support the economic recovery and would be able to continue lending to households and businesses even in the event of a further economic downturn.
Economic recovery and end of relief programs
With nearly 60% of U.S. adults fully vaccinated and most business operating restrictions lifted, the U.S. economy created about 850,000 jobs in June, and the unemployment rate rose from its peak of nearly 14, 7% in April 2020 to 5.9% in June 2021.The total number of jobs is still well below pre-pandemic levels (a difference of 6.7 million jobs), they have increased steadily this year , and the faster pace in June was a welcome sign. Most economists expect continued improvement in the labor market in the coming months as vaccinations continue, trade restrictions are relaxed, extended unemployment programs end and people return to the market. work. For example, in its June forecast, the ABA’s economic advisory committee predicts more than 530,000 new jobs per month for the rest of the year, with the unemployment rate falling to 5% by the end of the year. year.
Consumers also benefit from their accumulated savings; personal consumption spending rose nearly 19 percent in May compared to last year. As shown in Figure 3, responses to the Census Bureau Household Pulse Survey indicate that, compared to last fall, fewer credit card users reported having difficulty paying household expenses. household – a promising sign for the coming months.
However, the resumption of economic activity is accompanied by a gradual abolition of public aid. Expanded unemployment insurance is not officially expected to end until early September, but about half of the states have announced they will end the program sooner. These changes may have a positive effect on the labor market, as recent employer surveys suggest that the extra money has deterred workers from accepting jobs, especially in the retail and leisure industries. hotel. At the same time, the end of extended benefits can increase financial stress for consumers who are unable to find work.
Beyond unemployment insurance, the federal moratorium on evictions will also expire at the end of July. With millions of dollars in rent assistance still unallocated, some officials fear an eviction crisis if tenants are unable to make payments. However, the National Multifamily Housing Council reports that as of July 6, 76.5% of tenants were paying July rent, down 3.2 percentage points from the same period in 2019. Although this drop indicates that Fewer consumers pay their rent on time, the difference is relatively small, and most tenants continue to make their monthly payments on time. Indeed, the share of rents paid at the end of June 2021 was almost identical to that of June 2019
What happens next?
The end of many federal aid and bank loan forbearance programs raises questions about the impact on consumers’ financial stress. To further complicate matters, the delta variant of COVID-19 is spreading across the country, with pandemic cases increasing again after months of decline, especially in parts of the country where vaccinations have been delayed. Rising inflation is also a cause for concern: the recently released consumer price index for June shows the largest annual price increase since 2008, and the New York Fed’s survey of consumer expectations. Consumers for June showed that median inflation expectations over the next 12 months jumped to 4.8 percent. The full effects of further viral spread, inflation and the end of government programs may not be known for several months.
Yet consumers appear to be well positioned for the transition to the post-pandemic environment. Since many consumers paid off revolving debt during the pandemic, they are also better prepared for financial stress from inflation or other shutdowns caused by variants. According to the latest reading from the ABA Credit Conditions Index, slightly fewer EAC members expect consumer credit quality to improve over the next six months, although the high reading of 76.8 still suggests that EAC members expect consumer credit quality to remain strong.
In addition, the newly implemented child tax credits will provide a monthly increase of $ 250 to $ 300 per child per month to almost 90% of households with children, which should help alleviate any increase in financial stress. of consumers that occurs after the expiration of other assistance and support programs.
In summary, while delinquency rates and other indicators of consumer financial stress may increase as support programs are phased out, most consumers appear to be in good financial health, as illustrated in the latest bulletin. ABA Consumer Credit Delinquency.