How to Navigate the 2020 Economy
This blog post will be continually updated with timely and relevant insights gleaned from the latest Market Pulse weekly webinar and our U.S. National Consumer Credit Trends reports. [Last updated May 8, 2020]
The Imperative of a Proactive Portfolio Management Strategy During Economic Uncertainty
Unemployment Remains Biggest Economic Issue
The economy lost more than 20.5 million jobs in April as the COVID-19 pandemic continues to devastate America’s workforce. While economists expect more employment losses in the months ahead, several states are reopening and providing some levels of economic optimism. There are also indications that government stimulus is reaching consumers, helping to stabilize spending.
COVID-19 Fears Push Economy Lower
U.S. gross domestic product fell at a 4.8 percent annual rate in the first quarter of the year, the first decline since 2014, according to the Commerce Department’s latest estimates. On the consumer front, spending and personal income fell in March by the largest percentages in years. We also saw the latest weekly jobless claims push unemployment to record levels. The declining economic landscape is adding to the financial stress and concerns of American consumers.
The Labor Market
The nation’s unemployment rate more than tripled in April to 14.7% from 4.4% in March, and is now the highest since the Great Depression. Job losses were the highest in the hospitality sector, which shed 7.7 million jobs in April. Retail lost 2.1 million jobs and manufacturing shed 1.3 million jobs in April.
Consumer Credit Trends
To help our customers better understand the more immediate impact of the coronavirus pandemic on lending activity, Equifax recently began reporting our U.S. National Consumer Credit Trends report on a weekly basis. The information shared below reflects data from the April 27, 2020 weekly report, published May 4, 2020.
Access the latest weekly and monthly U.S. National Consumer Credit Trends report here.
Total outstanding balances on auto loans and leases are $1.373 trillion for the week ending April 27. This is comparable to the previous week and also a 1.3% increase from February 2020 month end. The number of outstanding accounts is 90.4 million which is consistent with the previous week. Compared to ten years ago, total auto balances stood at $718.2 billion and there were 61.2 million loans and leases outstanding accounts in April 2010. The severe delinquency rate (share of balances 60+ DPD) is 1.03%, unchanged from the prior week, and a 13 bps decrease from month end February 2020.
As of April 27, outstanding balances on bankcards stand at $762.9 billion, a 1.6% decrease week over week and a 7.0% decrease from February 2020 month end. The number of outstanding accounts is 470.8 million and has remained stable week over week. The severe delinquency rate (share of balances 60+ DPD) is 2.38%, a 1.5% increase week over week and a decrease from February 2020 month end when it stood at 2.54%. Card utilization has remained between 20% and 22% of total credit limits since the spring of 2011, with a seasonal variation. As of April 27th, the bankcard utilization rate stood at 19.9%.
First Mortgage Portfolio
As of April 27, there were 51.02 million outstanding first mortgage loans, remaining stable week after week. First mortgage outstanding balances have risen steadily since June 2013 ($7.747 trillion), reaching $9.591 trillion for the week ending April 27. Since the beginning of March 2020, first mortgage balances have increased approximately 1%. The severe delinquency rate (share of balances 90+ DPD, in bankruptcy or foreclosure) is 0.73% which is 1.0% lower than a week ago. Severe delinquencies are now at their lowest levels since January 2006 as a share of outstanding balances, and a new record low as a share of outstanding loans. Equifax began tracking this data in July 2005.
Consumer Finance Portfolio
As of April 27, outstanding consumer finance balances are $120.7 billion, a 1.3% decrease in total balances from February 2020 month end. Outstanding consumer finance accounts are 76.07 million, comparable to February 2020 month end when it was 76.10 million.
The severe delinquency rate (share of balances 60+ DPD) is 2.63% down from 2.92% as of February 2020 month end. Delinquency rates as a share of outstanding balances have been relatively stable as of late, with current delinquencies rate reaching historically low.
Proactive Portfolio Management Strategy During Economic Uncertainty
During the May 7 Market Pulse webinar, John Fenstermaker, Equifax Vice President and Chief Innovation Architect, put our latest Credit Trends report into perspective.
Our team conducted a deep analysis on the impact of accommodation on credit scores, and ways to mitigate those impacts. By simulating different scenarios, it’s possible to measure the impact the loss of information caused by accommodation will have on credit scores.
For example, John shared the results of a recent Equifax analysis on the score distributions and score performance under six different accommodation scenarios. The results showed that even in the most extreme situation, with 12 months of accommodation applied on 50% of consumers, there are about 78% of consumers with no change to their credit score. In 89% of consumers, the change is within plus or minus 10 points. In 92% of consumers, the change is within plus or minus 20 points.
Historically, credit scores do a very good job of capturing both a consumer’s willingness to pay, and a consumer’s ability to pay. When a credit score might not reflect an ability to pay is when a consumer has had a major life change like unemployment or medical crisis. These are attributes that have a high impact on credit scores, and as a result, need to be closely monitored. Conducting regular reviews using simulated scenarios and predictive analytics can help mitigate portfolio risks and help navigate the changing economic environment.
Economic Models and Forecasts
Among the questions that were asked during a recent Market Pulse webinar regarded economic models and forecasts for the second half of 2020. Amy Crews Cutts, President and Chief Economist of AC Cutts & Associates LLC and a guest on the webinar noted, “I think the basic outline for that is that all of the V-shaped recovery estimates or the baselines that are on the more optimistic side, have both the optimism that a good testing and tracing program will be put in place, and that the opening will be done with careful thought and protocols in place.”
Cutts added, “The baseline right now is still around the neighborhood of a 15% decline. This is, I’d say the consensus, is around a 15% annualized decline in the second quarter. The more pessimistic folks who are in the neighborhood of 25% to 30% decline in the second quarter, and that’s without adding in things like a W type recovery. We’re still trying to measure the downward trajectory. I would say on balance that the consensus forecast is better in the second, in the third quarter it may not be positive, but the rate of decline will be much, much slower.”
Looking for a Solution
Traditional monetary policy tools are not well equipped for a pandemic, according to Rob Wescott, president and founder of Keybridge, during our March 26, 2020 webinar – Economist Perspective: Coronavirus and the U.S. Economy. The Fed has cut interest rates. It’s using all the tools at its disposal to grease the wheels for when demand picks up. There have been wide swings in the stock market and corporations are on track for sharp losses in 2020. Oil prices are down sharply and currency safe havens haven’t been uniformly up, but should benefit.
The biggest financial concerns are around heavily indebted businesses. They will be particularly susceptible to a growth slowdown. Those U.S. business sectors include airlines, hotels, cruise lines, retail, oil and gas, commercial real estate, transportation and distribution, and small businesses.
Long-term Effects on the Economy
Coronavirus may have several long-term effects on the economy. Businesses may look to diversify supply chains away from China. Larger budget deficits and government debts are expected due to coronavirus. Consumers may or may not return to normal social or financial behaviors post-pandemic.
Tune in to our weekly Market Pulse webinar series for updates on the economy, credit trends and additional timely insights aimed at helping businesses navigate these uncertain economic times.
Scenario Forecasting to Better Manage Risk and Expectations
During this unprecedented time, lenders and service providers are striving to predict losses and better manage risk in their portfolio. One of the main themes we are focused on to help them navigate this fast changing environment is a concept we call “monitoring with agility.” It’s a data-driven approach that can improve modeling and forecasting by simulating different economic scenarios. For example, on our most recent Market Pulse webinar, we conducted a forbearance simulation on credit scores. That simulation enables lenders and providers to have a better view of what a six month go forward score would look like under an individual forbearance scenario. We can do that with dozens of different elements.
Through our partnership with Moody’s, you can also take Equifax credit trends data and merge it with Moody’s economics scenarios through our CreditForecast.com platform.
Having the ability to look at different credit elements over time in various economic environments, gives you a clearer picture of potential outcomes. In this fast changing environment, we’re encouraging our clients and partners to “monitor with agility” by leveraging the power of credit data and analytics in different simulated environments.
The new Equifax Response packages have been developed from our full suite of differentiated data and solutions (including credit, alternative data, employment & income, and wealth information) to address the evolving needs of businesses in the wake of COVID-19. We’re providing a range of resources to help clients navigate this uncertain time, including:
- Equifax Response FREE provides complimentary access to economic and credit trends and tools for optimizing business performance. Abridged U.S. Credit Trends reports, webcasts with the most current market information and customer consulting are all available. The FICO Resilience Index helps lenders predict a consumer’s ability to pay during economic downturns.
- Equifax Response NOW provides context on what’s happening with businesses and consumers at a market level with access to credit trends data, economic forecasts, consumer financial behavior and employment solutions to help identify credit risks. Packages that provide comprehensive portfolio reviews including employment information and alerts from The Work Number are available.
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