An Economist Answers Your Questions About 2021
With a new president-elect and COVID-19 cases on the rise, businesses face some uncertainty as they plan ahead. The November 5 Market Pulse webinar addressed concerns as our panel of economists discussed their U.S. economic and credit outlook for 2021. The panel included Amy Crews Cutts, President and Chief Economist at AC Cutts & Associates; Mark Zandi, Chief Economist at Moody’s Analytics; and Rob Wescott, President of Keybridge Research LLC.
Participants followed up with questions about consumer debt, credit scores, unemployment and more. Amy Crew Cutts answers those pressing questions below.
Watch a replay of the Nov. 5 webinar, “Market Pulse: Economist Panel on the Outlook for 2021.”
Jump ahead to a specific topic:
It was mentioned that some of the reduction in Continuing Claims is due to eligibility expiration. How much of today’s 1.6 million reduction in continuing claims $2B Pandemic Unemployment Assistance (PUA) is explained by this factor?
Amy Crew Cutts: About 3/4 transitioned out of regular UI and into extra long-term benefits.
Do you feel there is a part of the economy that was able to increase savings and WFH will pull along the economy? Or are you expecting fiscal drag?
Amy Crew Cutts: Without additional stimulus, given that the virus is far from controlled at present, I expect there to be considerable drag. For those unemployed, JPMorgan Chase Institute has shown that in August they exhausted most of the savings they had built up from the direct payments to households and extra unemployment benefits.
Can you tell us what the unemployment rates look like by income band?
Amy Crew Cutts: No, unemployment is not reported that way in the employment survey. However, with what is reported on affected industries and average wages, we do know that lower wage workers are deeply affected by the layoffs that have occurred. Thus, wages rose even as employment fell because higher wage workers were able to keep their jobs, as the average wage only reflects those still working.
Do you think the Fed is prepared to ramp up or adjust Quantitative easing?
Amy Crew Cutts: I think the Fed will continue to use any and all measures it deems necessary to resolve any liquidity problems or to promote economic growth, including additional purchases of long term assets, mortgage backed securities and other securities. I do not think they will hesitate to act or to undertake a new action, if conditions warrant.
What explains the large increase in Disposable Personal Income in April?
Amy Crew Cutts: It is when the CARES Act Economic Impact Payments to households kicked in ($216B), along with the start of the additional unemployment benefits ($17B), which offset the loss in wages and then some.
What intergenerational differences are you seeing in the pandemic’s impact on wealth?
Amy Crew Cutts: The value of household assets has risen sharply – up $7.6 Trillion from 1Q to 2Q’20 (see for example the Federal Reserve Board Financial Accounts of the United States Z.1 tables, B.101 Balance Sheet for Households and Nonprofits). This, of course, only applies to those who have assets, which means older households are faring better on net wealth than younger ones who have not had enough time to accumulate much wealth.
What happens if the 91% student loan payments come off deferral? Is there a deadline or is it gauged with the crisis and will end only when the economy is strong again?
Amy Crew Cutts: By executive order on August 8, President Trump ordered the Secretary of Education to extend the automatic deferral of federally-backed student loans through the end of 2020. Once that automatic deferral ends (think of it as opt-out deferral), the borrowers will have the option to make income-based repayments (which may be lower than what they were previously paying) or continue in a deferral if they remain unemployed or otherwise qualify. It is possible that Congress or the president may further extend the deferral for federally-backed student loans.
What do you think would be consumers’ priorities with regards to their various debt holdings as the economic situation changes?
Amy Crew Cutts: I think we will see more traditional payment priority of homes, cars and then credit cards. Home prices are rising, so home equity will be a driving force for making payments if able. If not, we will see consumers selling and retaining that equity for the household. Cars are not as necessary for those able to work from home, which will speak more to car buy demand than for delinquency. Those who need the car to get to work will work to make payments to ensure they keep that job. Student loans, at present, appear high in the payment hierarchy because of the CARES Act automatic deferral with mandatory “current” status reporting. (Note: many are not being reported with the standard deferral narrative code, instead using other options consistent with the CARES Act reporting guidelines from CDIA). Federally backed student loans have deferral and income-based payment options built in, so these should not cause undue stress.
If taking advantage of payment accommodations – deferments, payment holidays, etc. – does not negatively impact credit scores, can we put much stock in FICO scores (the increases that Amy referenced)?
Amy Crew Cutts: The credit score story is greatly nuanced. The rising scores in new account originations is likely due to lenders tightening standards, which often happens in recession. But also, the suppression of student loan delinquency may be causing the average score to rise more than it otherwise would (the NY Federal Reserve has noted a 10-point rise in average VantageScore for all student loan borrowers), and other forbearance options granted by the CARES Act may be keeping some borrowers out of default, thus minimizing normal and recession related downward transitions in scores. Credit scores have lasting predictive power many months beyond when they were generated, as many financial behaviors are deeply rooted. While credit scores alone may have lost some of their predictive power given all that has occurred (none are modeled on pandemics!), lenders have other options available like greater reliance on trended data. And some scores are better than others, such as newer generation scores that use trended data or other alternative data are less susceptible to the effects of temporary changes in the current status than older score models.
Weren’t student loan deferrals supposed to end in September?
Amy Crew Cutts: Yes, as written in the CARES Act. But by executive order on August 8, President Trump ordered the Secretary of Education to extend the automatic deferral of federally-backed student loans through the end of 2020, which she has done.
What do you think about the housing market? Is it abnormally too hot?
Amy Crew Cutts: No, very low interest rates and the dichotomy between who has kept jobs (higher income) vs. not during this economic crisis has kept up demand for homes. Very low inventory has meant continued strong competition for listings and this will not abate easily.
Will the mortgage origination highs of 2020 continue through 2021?
Amy Crew Cutts: It is unlikely that 2021 will set a bigger record. But, if very low interest rates continue, then 2021 could be another very good year for originators. Fannie Mae’s current forecast is for mortgage rates to remain below 3% for the next six quarters (a little more optimistic than the WSJ Survey of Economist’s 10-year Treasury Forecast would suggest). Many who could have refinanced will have already done so, and for that reason alone expect volume to be down 15-25%.
When you look at all the new mortgage originations, are people taking cash out to pay down cards? Has the refinance boom resulted in cash out?
Amy Crew Cutts: There is no evidence of this occurring. Freddie Mac publishes the most detailed regular report on refinancing (available here: http://www.freddiemac.com/research/datasets/refinance-stats/index.page). However, rates are the lowest they have ever been, and thus rate and term refinancings are dominating. The volume of equity being cashed out has risen, but only represents 6% of the new outstanding balances on these loans – not a “house as ATM” situation.
Is it fair to assume FICO8 score increase is driven at least in part by lower income borrowers who are not spending as much or as frequently?
Amy Crew Cutts: No it is not, for two reasons. One is that lenders automatically get more cautious in recession, thus raising thresholds for loan acceptance. Also, ABS markets have suffered since March with liquidity, so financing has been less available for nondepository, noncaptive finance companies, which means fewer subprime lenders are able to make loans at the level they might otherwise want to. I do not have insight otherwise into income-based car finance demand, but my economic instinct would say that higher income work-from-home car demand may have fallen since March and that only those who really need a car (lease expiring, jalopy finally died) or who can negotiate a good deal from a position of strength are main market segments now.
Why are credit scores rising for auto buyers? Is this skewed by approvals being limited to buyers with higher credit scores?
Amy Crew Cutts: There are two reasons. One is that lenders automatically get more cautious in recession, thus raising thresholds for loan acceptance. Also, ABS markets have suffered since March with liquidity, so financing has been less available for nondepository, noncaptive finance companies. Therefore, fewer subprime lenders are able to make loans at the level they might otherwise want to.
For more economic predictions and analysis, watch the November Market Pulse webinar now.
Recommended For You
Form I-9 Employment Authorization Document Validity Extension Extension of Validity of Certain Forms I-797 Due to Continued Employment Authorization Document […]
A Surge in COVID-19, Vaccine Expectations and Economic Stimulus The announcement of a vaccine is certainly cause for an upgrade […]
Technology Investments Help Deliver Benefits Faster to Those in Need The need for quick access to social safety net programs […]
Buy Now, Pay Later FinTechs are Well-Positioned to Drive Holiday Sales in 2020 Buy now, pay later FinTechs are well-positioned […]