‘Delayed V-Shape’ Recovery Taking Place? We’ll Know Soon

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Experian’s “Quarterly Economic Scenarios” forecast on July 21 was just one of several discussions percolating this month on how the U.S. economic recovery is taking shape and what might be in store for lenders, businesses, and consumers in the second half of 2020:

  • There’s a 48 percent chance of a “delayed V-shape” economic recovery, which would help push down the unemployment rate to 6 percent sometime in mid-2021 (although “under-employment” would still be an issue). This is a delayed scenario. It is not as fast as a V-shape recovery, but it’s still better than the alternatives, such as a W-shape, U-shape, or others (checkmark, square root, or even Y-shape). The chance of a “real” V-shape recovery is 27 percent, a W-shape at 10 percent, and a U-shape at 15 percent. (A W-shape recovery remains to be seen and unfortunately could lead to a credit/financial crunch in the business and consumer arenas). Individually speaking, some states hit hardest by the February – April recession will experience a W-shaped recovery as job losses versus a particular state’s economic comeback is looking different for various reasons.

  • About 33 percent of U.S. jobs that were lost since the depths of the Coronavirus pandemic-induced recession have been recovered. Approximately 8 million jobs have been restored and 17 million are still lost. A rising number of individuals surveyed are saying their layoffs are “permanent” (2.9 million in June, up from 2 million in April). Unemployment data is very “noisy” right now as many furloughed workers still aren’t completely sure whether their employers will call them back to work, and as some decide to officially leave the labor force (the pool of adults who are willing to work and are looking for a job).

  • It remains to be seen whether the most recent recession will evolve from an economic and government-induced supply/demand shock into a longer term credit/financial problem. With monetary and fiscal policies by the government in play, a credit “shock” seems to have been averted. But the unknown pace of the economy’s recovery through the second half of 2020 is giving pause to some experts who initially believed a massive credit-tightening cycle was off the table. Some experts say this scenario is still a possibility.

  • As a measurement, the unemployment rate is still relevant; however, using it as an economic benchmark on a monthly basis is not useful right now. To get a clearer picture, business leaders and lenders need to ascertain how long certain individuals have been unemployed, and how high the chances are of some re-entering the labor force (or not). This will take time. The unemployment rate can still be used as a signal, but society needs to look past this number that’s discussed on a monthly basis.

  • Specific job sectors (not the entire economy) that have experienced the largest negative shock and reduction in jobs are actually experiencing the much-hoped “V-shaped” recovery right now. These are positions in leisure/hospitality; trade, transportation, and utilities; and education and health services. All other employment sectors and industries are not experiencing a V-shape recovery, contributing to weekly initial unemployment claims (which have gone from 6.9 million per week back in March to an approximate 1.3 million last week). However, financial services is the one sector so far that is holding up the best. On a side note, consumer sentiment is already going through a W-shaped recovery.

  • The economic pain on many consumers and businesses is being pushed into late 2020 and early 2021 due to loan modifications, extensions, and forbearances by lenders. Today is still a potential calm before a “second storm,” although time will tell. The current spike in the economic recovery will probably moderate going into the next few quarters. For instance, the last job sector to feel pain is the public sector — local, state, and federal government employees (it has not fumbled yet). It will be interesting to see how state and federal policymakers balance maintaining economic support while slowly weaning the job market and households off various forms of direct financial aid and other economic supports.

  • Overall, borrower demand for lender credit is down, but for mortgages and autos it is still up year over year. However, recent loan originations show a shift to prime-and-above credit borrowers due to economic/labor market and other lender risk aversions. Credit cards and personal loans have dropped and are finally leveling off (finding a floor). Credit scores are plateauing and leveling off after increasing over several months coming out of late 2019.

  • Loan loss forecasting will continue evolving monthly, if not weekly, for many lenders. Lenders across the board are anticipating the impact of credit policies, collection strategies, and marketing activities. They are also taking into account the regulatory sphere as they project required loan loss reserves and calculate possible CECL projections (Current Expected Credit Loss) over the longer term. Survival through the remainder of the COVID-19 recession will require an ongoing understanding of possible outcomes of the pandemic’s impact on critical decisions in local and national business/employer decisions.

  • You can see more economic and borrower/credit trends during COVID-19. Access Equifax's "Market Pulse: Adapting to the Next Normal" webinar slides from July 23 by clicking here.

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