Consumers Remain Resilient as the Economy Rebounds

Economic Analysis from ABA

Consumer delinquencies were subdued throughout 2020 during the pandemic-induced recession. As reported in ABA’s Consumer Credit Delinquency Bulletin, delinquencies remain far below levels seen during and after the 2008-09 recession, though they have increased in some sectors, particularly bank card accounts. Overall, delinquencies accounted for 1.63 percent of loan balances in the first quarter of 2021, down 61 basis points from last year. For most types of closed-end credit (such as personal, auto, mobile home, home equity and property improvement loans), late payments continued to fall in the first quarter.

Figure 1 (click image to enlarge).

As shown in Figure 1, the Federal Reserve Bank of New York also found that delinquency rates fell for most consumer loan categories after the economic downturn, particularly for student loans and mortgages. Similar to ABA’s findings, the New York Fed found that credit card delinquencies ticked up in the first quarter of 2021; from the final quarter of 2019 to the first quarter of 2021, delinquencies fell for mortgage loans by 45 percent, by 3 percent for auto loans and by 44 percent for student loans.

Why have delinquencies stayed so low during the recession?

The low delinquency levels during the current recession stand out compared to sharp upticks in previous economic downturns that remained elevated in the recoveries. Three major factors have kept delinquencies low this time around: a sharp reduction in consumer spending, historic levels of fiscal stimulus and other federal assistance measures and support from the banking industry. These factors together improved consumers’ financial standings, even as they faced a historic decline in business activity and rise in unemployment.

Reduced consumer spending. In the early days of the pandemic, consumer spending plummeted as businesses closed and mobility was severely curtailed. Personal consumption expenditures, which normally rise steadily, plummeted by more than 16 percent from April 2020 to April 2021. Even during the 2008–09 recession—the worst since the Great Depression—PCE never fell by more than 3 percent year-over-year.

Figure 2 (click image to enlarge).

The sharp decline in spending was reflected in a significant drop in credit card debt in 2020, making up only 4.7 percent of disposable income in the fourth quarter of 2020 (compared to nearly 5.4 percent in the first quarter). At the same time, total revolving credit fell by more than 10 percent ($116 billion) from January 2020 to May 2021 (see Figure 2).

Federal support measures. In response to the economic shutdown, the federal government acted quickly to shore up consumers and businesses via fiscal stimulus. Beginning with a suite of three relief bills passed in the early days of the downturn (the largest of which was the CARES Act), Congress and the Trump and Biden Administrations implemented myriad additional measures throughout the pandemic to mitigate the economic fallout. These bills expanded and extended unemployment insurance, provided aid to small businesses, offered lifelines to key industries that were particularly vulnerable to the pandemic, reinforced state finances, and sent several thousand dollars of direct payments to most Americans. Combined with lower spending levels, these policy measures allowed consumers to focus on paying down debt. Indeed, the Census Bureau’s Household Pulse Survey found that nearly 50 percent of people who received the third stimulus payment used the money to pay down debt. Non-financial aid, such as moratoria on evictions and foreclosures, also kept people in their homes and helped ease the burden of monthly bills for many consumers.

Help from banks. Banks played a significant role in keeping consumers afloat during the recession. America’s banks supported consumers by waiving late fees, deferring loan payments and lowering interest rates. Importantly, banks were able to support consumers while also protecting their balance sheets against further economic shifts. According to the most recent Federal Reserve stress tests, banks are well-capitalized, with capital ratios double the minimum requirement level even in the worst-case scenario. Based on this evidence, Fed officials believe the banking system is in a good place to support the economy’s recovery and would be able to continue lending to households and businesses even in the case of another economic downturn.

Economic recovery and the end of relief programs

With nearly 60 percent of American adults fully vaccinated and most business operating restrictions lifted, the U.S. economy added roughly 850,000 jobs in June, and the unemployment rate has fallen from its peak of nearly 14.7 percent in April 2020 to 5.9 percent in June 2021. While total employment numbers are still well below pre-pandemic levels (a difference of 6.7 million jobs), they have risen steadily this year, and the faster pace in June was a welcome sign. Most economists expect continued improvement in the labor market in the months ahead as vaccinations continue, business restrictions are relaxed, expanded unemployment programs end, and individuals return to the workforce. For example, in its June forecast, ABA’s Economic Advisory Committee expects more than 530,000 new jobs per month over the remainder of the year, with the unemployment rate falling to 5 percent by year’s end.

Figure 3 (click to enlarge image).

Consumers are also enjoying their pent-up savings; personal consumption expenditures were up nearly 19 percent in May compared to last year. As shown in Figure 3, responses to the Census Bureau’s Household Pulse Survey indicate that, compared to last fall, fewer credit card users reported difficulty paying for household expenses — a promising sign for the months ahead.

Along with the resumption of economic activity, however, comes a phase-out of government aid. Expanded unemployment insurance is not officially scheduled to end until the beginning of September, but roughly half of the states have announced that they will end the program early. These changes may be having a positive effect on the labor market, as recent employer-based surveys suggest that the extra cash has been discouraging workers from taking jobs, particularly in the retail and leisure/hospitality sectors. At the same time, the end of extended benefits may increase financial stress for consumers who are unable to find work.

Beyond unemployment insurance, the federal eviction moratorium will also expire at the end of July. With millions of dollars in rental assistance still unallocated, some officials fear an eviction crisis if renters are unable to make payments. However, the National Multifamily Housing Council reports that, as of July 6, 76.5 percent of renters paid July’s rent, down 3.2 percentage points from the same period in 2019. While this decrease indicates that slightly fewer consumers are paying rent on time, the difference is relatively small, and most renters continue to make monthly payments on time. Indeed, the share of rents paid by the end of June 2021 was almost identical to that of June 2019

What comes next?

The end of many federal aid and bank loan forbearance programs raises questions about the impact on consumer financial stress. Complicating matters further, the COVID-19 delta variant is spreading across the country, with pandemic cases rising again following months of decline, particularly in parts of the country where vaccinations have lagged. Rising inflation is also a cause for concern: the recently released Consumer Price Index for June indicates the largest annual increase in prices since 2008, and the New York Fed’s Survey of Consumer Expectations 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.

Still, consumers appear well-positioned for the transition to the post-pandemic environment. Because many consumers paid down revolving debt during the pandemic, they are also better prepared for financial stress due to inflation or further shutdown measures caused by variants. According to the latest ABA Credit Conditions Index reading, slightly fewer EAC members expect consumer credit quality to improve over the coming six months, though the lofty reading of 76.8 still suggests that EAC members expect consumer credit quality to remain strong.

Further, the newly implemented child tax credits will provide a monthly boost of $250 to $300 per child per month to nearly 90 percent of households with children, which should help mitigate any increase in consumer financial stress that occurs as other relief and support programs expire.

In sum, while delinquency rates and other indicators of consumer financial stress may rise as support programs are phased out, most consumers appear to be in good financial shape, as illustrated by the latest ABA Consumer Credit Delinquency Bulletin.