Show Notes
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: Cris, let's start with the broader economic landscape. Where do we go from here?
Cris deRitis: Clearly it does feel like something else is happening. I think of the economy today as being right in the eye of a hurricane. We had that first wave of the hurricane back in March/April with COVID-19 coming into play and the shutdowns going into effect. After that, we kind of entered the eye of the hurricane as we provided some stimulus to the economy and parts of the country did start to open up once again. And now it feels like we're about to go on the other side of this hurricane. And for that reason, I do think the next six-12 months are going to be a struggle. I think there is going to be some pain when it comes to businesses going out of business because they've received some support.
But now that that support is ending, I do expect to see a number of businesses failing and that's going to take a lot of jobs down with them. I think the next few months are going to be a struggle when we are dealing with the virus, dealing with the lack of fiscal support coming from the government. There are some brighter spots out there. So, I don't think things are falling off the cliff, but I think we have to be prepared for some leaner times ahead until we, we see some brighter days here.
Theresa: Do you see that having a short-term impact on consumer spending?
Cris deRitis: Absolutely. I think the stimulus, the expanded unemployment insurance that we've been providing to folks has been instrumental in keeping credit card balances, other balances, other consumer debt products, keeping their delinquency rates relatively low. The, the extra money definitely helps in an environment where you do have such high unemployment and we still have 30 million people who are receiving some form of unemployment insurance benefit every week. So still a lot of households and families are dependent on that aid. So, despite the fact that we've seen some improvement in the labor market and certainly hope to see that continue, I think you are going to see a number of families struggling until that labor market does fully heal.
Theresa: You mentioned a moment ago that there are some bright spots that it's not all doom and gloom. Can you share what those are?
Cris deRitis: So any company offering video conferencing services or any of the businesses that have been able to successfully transition to online or delivery... certainly they're doing all right. And their employees have fairly stable prospects there. Some of them are even getting some wage increases. So there are certainly some winners, if you will. Another interesting stat I just ran across was the number of new business applications. So this actually is actually up over the last few months, so we do see some revival of entrepreneurship. Now it might be too early see how far this actually goes, but that's certainly a positive sign that the people who may be out of work are looking ahead, are still remaining optimistic and looking for ways to increase their income, find new opportunities by starting their own business. So I do think that there's still a lot of resiliency in the U.S. economy.
Theresa: Another question that we often get is what direction will the economy take?
Cris deRitis: Right now it looks like a check mark or extended check mark where we had that sharp drop in activity earlier in the year as we were shutting down much of the country. And then as we've been reopening and we've been adding back jobs to the economy, we've slowly seeing things improve over time. Now there is certainly a risk of some downfall after this, some weakness going forward. But we do expect to see the economy kind of trugging along if you will overall over the next few quarters here.
Once we get a vaccine or a therapeutic, or we have some way to really deal with the virus, we do expect to see some acceleration. Now that said, I would say that the economy is more of a K type of recovery in the sense that you have some people who are doing really well like people who have had exposure to the stock market. People who are able to work from home are doing relatively well. And you can see that in terms of home sales and auto sales, but there are certainly another part of the country that is on a much more serious downward type of path. Folks who have been working in leisure and hospitality industry, for example, or the tourism industry or the airlines.
Theresa: Let's talk more about consumer spending and potential impact on consumers.
Cris deRitis: We are seeing some very strong changes or very large changes in the way consumers are spending. We are a service-based economy, about 70% of all consumption goes to services. And yet in this latest shock due to the Coronavirus, we've seen that services have taken the largest hit. All parts of the economy are certainly down, whether that's a durable goods or non-durable goods. Those sales are also down, but they're not down as large or in percentage terms as what we've seen in services. So we do see consumers really cutting back on services of all kinds, whether that's financial services or a restaurant type of service.
Theresa: What trends are we already seeing in the consumer credit?
Chris Walker: We have seen a couple of products where there has been rising balances, albeit well below the pre-COVID period. But one of those is auto. And I know Chris mentioned that as well, and that's one that we've been seeing rise. And, we've also been noticing from a form of possible accommodation that there's been a drop off there for the auto sector. And now that seems to be relaying into a rise as well in auto delinquency. And we've noticed a slight rise there for the second a week in a row.
Theresa: You mentioned that we're starting to see a drop in possible accommodations for auto and that, that might be translating into delinquencies. Tell me about that.
Chris Walker: Yes, exactly. So since the enactment of the CARES Act with one of the six forms of possible accommodations being placed on the file by particular product we've been trending that and overall it's trended down slightly over the last four or five weeks. But auto in particular has had the largest decline in possible accommodation. And it's mainly come from from two codes. One of those is the disaster code that lenders use to report that form of possible accommodation to us. The other is inferred where we are calculating and inferring that a loan is under a possible accommodation combination by looking at 1) the balance and 2) the scheduled payment amount. And in that case, the scheduled payment amount would be zero, but yet it would have a balance. So we're using that as inferred. So those two codes have been declining the greatest for auto over the last few weeks. And now we're seeing an uptick over the last month of auto delinquencies. So we're seeing those slightly rise week over week.
Theresa: David, what are you seeing on the forecast side of things?
David Fieldhouse: We are definitely forecasting some problems in auto. What we are seeing towards the end of the year is definitely a rise in delinquencies. And this is coinciding with the labor market still having problems and all the stimulus money beginning to dry up or at least not be as plentiful as it was earlier in the year. So we are anticipating some problems. It seems to be a little bit worse with the finance lenders and a little bit worse in the subprime space. It appears overall though that we may come in with a bit of a softer landing than we were thinking a couple months ago. Ultimately it's maybe not to the height of what we saw during the financial crisis.
Theresa: Sarah, what are the biggest trends that you're seeing with small businesses today?Sarah Briscoe: Small business is really nuanced right now. We're seeing some location-specific trends and some industry-specific trends based on the nature of the recovery. There is overall national growth in lending, like delinquency 30 to 90-days past due is improving compared to the prior few months. It actually kind of peaked in June for most of the adversely affected industries. But we are seeing a delinquency that is severe, you know, 90 days past due or defaults. Those are on the rise still. So it's a bit of a mix right now.
Theresa: Where do you see the positive news on the small business front?Sarah Briscoe: It's interesting. The Northern States like the Dakotas, Iowa, Montana, Idaho, Minnesota -- those are generally lower risk. There is generally higher risk in the South. In the Western states like California, they are more risky right now. And then we are also seeing big increases in New Jersey, New York, Massachusetts, as compared to say six months ago in delinquency. But those are improving because of the economy in those States. So it's high compared to six months ago for Atlantic States, but it is looking better recently.
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