Fiscal Stimulus and the K-Shaped Recovery

Market Pulse

In this episode of the Market Pulse monthly, we focus on the U.S. economy and credit insights -- both consumer and small business. This transcription is edited for brevity. Listen to the full podcast for more great insights.

Theresa: Let’s start with the macro economy, and more specifically, fiscal stimulus. Chris, it seems things are changing by the day, and at times, by the hour. Are we going to get additional stimulus? And if so, when and what might it look like?

Cris deRitis:

That's a great question, Theresa. It's really critical to the economic outlook, certainly in the short term. I think the question really is when. I'm fairly confident that we will get some fiscal stimulus because the economy remains weak, although there's been some improvement. We are putting more people back to work. Still, we have over 800,000 people filing for unemployment every week. So, clearly there is a need for some additional support. The timing now really depends on the election outcome. I believe there's a chance that we are able to reach a deal before the election, and every day we get another piece of information that sounds encouraging at times; It sounds discouraging other times. So, it's possible that we get something before the election, but my working assumption right now is that it will be after the election. And then, the precise timing will depend on who actually wins the election.

Theresa: I know I've seen updates around whether we'll get another $1,200 stimulus check and potentially extended unemployment benefits. You and I have discussed the aid to state and local governments. Can you help us understand how each of those elements might go?

Cris deRitis:

I think all of these elements are still on the table. Again, there's negotiation going on, on both sides with the house Democrats and the Senate Republicans in the White house, having all different views. I think each one of these elements or some flavor of these elements is still likely to show up in the final package.

I think the debate is really around the size of the checks. Maybe the qualifications on the amount of money that might be granted for families with dependent children or older dependent children. So those are really the details where we have some other debate, but I do expect to see some form of check going forward.

The extended unemployment insurance benefits have been critical as well. That's the extra $600 a week that folks were getting as part of their unemployment insurance package. That extension ran out at the end of July, essentially. At this point, you have families really making do with the standard benefit and with whatever savings they've accumulated. And that means that they are now vulnerable. At this point, as we were looking at October, November, some of those savings are running awfully low.

Theresa: Last time we spoke about the potential shape of the recovery, and even during the presidential debate a few weeks ago there, the topic of a K-shaped recovery came up. Do you still see the K-shaped recovery? And help us understand a little bit how that's looking.

Cris deRitis: Unfortunately, I do. Another way to put it is that we have a two-track type of recovery. You have one part of the population that is doing relatively well – or even great. But some households, some individuals are certainly doing better than others. So, the recovery has been much stronger for those folks who have jobs where they can work from home. Higher income and higher wealth households are doing better. More highly educated people certainly have more opportunities. Their stock market portfolios have recovered in terms of their values, house prices continue to rise.

On the other hand, you have the 75% of the population or so who have to show up to work. They can't work from home very effectively. And they may be working in industries that were very hard hit by the COVID-19 crisis. So, if folks are working in leisure and hospitality or bricks and mortar retail, the economic recovery is certainly much, much slower. And they may not have savings or some of the stock market wealth that I alluded to. So, I am concerned that we will have even more inequality, at least for a while, as we work through this recovery. And that’s all the more reason why we need additional fiscal stimulus, particularly to ensure that those folks who are struggling to move ahead in this recovery have the support they need to put food on the table and meet their obligations. And at the same time, give them some breathing room to look for a job or to start a business.

Theresa: Now we're going to shift to focus more specifically on consumer credit, both current trends and outlook. Chris, is there anything in the data that is really jumping out at you today?

Chris Walker:

There is. Total consumer debt is up about 3%. The delinquencies still remain low, and they're actually about 50% less than they were a year ago. We know that's driven by the CARES Act. When you drill down, you go into certain products. So, auto and our bank card and private label cards -- all those have actually been experiencing somewhat of a rise in delinquency over the past few weeks. And that corresponds to declines that we've seen in possible accommodation. Now, the percentage of balances that we see under a form of possible accommodation reached a peak in June of this year. And since that time, it has been declining. This past week, we held at 6.9% of balances under one of the forms of possible accommodation. But a couple of accounts actually started increasing and that's the first time we've seen that since we began tracking possible accommodations, and it was really around the card and home equity. All the others really remain steady.

David Fieldhouse: We are forecasting that delinquencies will rise. So, if payments took a holiday in the summer, and we didn't see any delinquencies in the summer, some of that's going to come due in the fall and heading into the winter. Across the board, our models are forecasting rises in delinquencies. It's definitely very muted in a space like mortgage because it's being supported by a really active, healthy housing market.

But when we look at auto, specifically looking at more of the auto finance, we see some problems emerging. Our models are forecasting rises and delinquencies. When we look at bank card or retail card, we are also seeing our forecast driving higher delinquencies. A lot of that has to do with the labor market still being in rough shape. The story of the summer has been that the economy has been bolstered by all the extra disposable income. But once we get into fall, especially if that stimulus doesn't arrive, we're really going to have a credit market in an economic environment with a 7% unemployment rate. That's going to start to really drive up delinquencies.

Theresa: Sarah, what do you see as you look at the data on small business credit trends today?

Sarah Briscoe: Lending has dropped a little from the short-term increases that we saw earlier this year. So, this month we did see a little lending drop. The biggest drops were accommodations and food, arts and entertainment and education, which makes sense given the uncertainty of the conditions in those industries. Construction is really the only industry that's showing extremely positive growth right now in terms of lending.

For delinquency, we’re seeing drops. That would be 31 to 90 days past after a steep increase ea...