Credit Risk

2021 Planning in a K-Shaped Recovery: Your Questions Answered

2021 Planning in a K-Shaped Recovery: Your Questions Answered

January 22, 2021 | Theresa Freas

The start of a new year holds both uncertainty and hope for an economic recovery. For our January 14 Market Pulse webinar, our panel of experts discussed the diverging paths evidencing a K-shaped recovery. This month’s presenters included Amy Crews Cutts, President and Chief Economist at AC Cutts & Associates; Cris deRitis, Deputy Chief Economist at Moody’s Analytics; Jennifer Cox, Risk Solutions and Consulting Leader at Equifax; and Tom Aliff, Senior Vice President of Data Analytics and a Consulting Leader at Equifax.

Participants followed up with audience members’ questions about stimulus checks, the 2021 economy, FICO scores and more. Amy Crew Cutts, Cris deRitis, Jennifer Cox and Tom Aliff answer those critical questions below.

Watch a replay of our webinar, “Market Pulse: Planning in a K-Shaped Recovery” or download a copy of the presentation.  Jump ahead to a specific topic:


Do you think that individual states will disperse their own stimulus payments to cover shortfalls from the federal stimulus? California for example is trying to pass its own stimulus fund of $400 - $500 million.


Cris deRitis: Yes, we do see some states pro-actively passing their own stimulus programs to deal with the issues unique to their populations. At issue is the degree of fiscal space available with some states' finances in better shape than others. While some states can dip into rainy day funds or access the debt markets, others are financially constrained and require federal support.

On the renter support provided in the stimulus package: Does this provide any relief for the landlords? Or, just those that are renting? 

Amy Crews Cutts: As far as I can tell, it is direct payments for rent and utilities and is targeted to very low income families. It will be distributed to states and communities that apply for assistance. Because of the targeting, I think it will be slow in getting out to landlords - lots of paperwork. Great new study here on efficacy of assistance:   

General Economy

What is the underlying cause of the south/west recovering stronger than the northeast?

Cris deRitis: A primary reason is that the south and west were growing faster than the northeast prior to the arrival of COVID. The pandemic accelerated trends that were already in place. Further, the shift to remote work and the desire for more space has motivated more households to move to the southern and western areas. Finally, the concentration of COVID cases in the Northeast early on in the pandemic has had lingering effects as residents who temporarily relocated to other areas have yet to return. 

Are there any predictions on interest rate changes through 2021 year-end?


Amy Crew Cutts: Nearly all economic forecasters are predicting rising rates through the rest of the year. Ten-year treasury rates have already ticked up, but mortgage rates are still trending down for now.

U.S. consumer prices ticked higher at the end of 2020 as Americans contended with higher gasoline and food costs, along with a rise in coronavirus cases across the country. Do you think this trend will continue to increase throughout 2021?

Cris deRitis: Certain product categories such as lumber may experience an increase in the short term stemming from supply chain constraints. More broadly prices may rise along with consumer spending as pent-up demand is unleashed, however, labor market slack and productivity improvements will likely keep prices from skyrocketing. Nonetheless, a sharp spike in inflation requiring an aggressive monetary policy response is a risk to the longer term outlook.

Please elaborate on the different forecasting scenarios.

Cris deRitis: Please visit our Moody’s Analytics web page or send us a note for additional information on the construction of the economic scenarios.  

Credit and Lending

Discomfort on public transportation during the pandemic was mentioned as one possible driver of the increase in auto sales in credit trends.Are there other known drivers?

Cris deRitis: Strong auto sales have also been driven by low interest rates as well as movement by some households to more suburban areas. Some demand was likely pulled ahead from future periods, which will lead to a slowing in sales in the short term. Supporting growth in vehicle sales, particularly light trucks, would be continued demand for new homes as well as the passage of a large-scale infrastructure bill.

Will Equifax be utilizing FICO 10T in any of their product offerings?

Jennifer Cox 

Jennifer Cox: Yes, Equifax can provide FICO 10T.

Presenters say they are not seeing a forecast of pent-up demand for households to resume spending at the end of the pandemic. Do you expect pent-up spending to occur, but one that will not correlate to a bubble of household debt increase?

Cris deRitis: I do expect pent-up demand to be released, but again, I would refer back to the K-shaped recovery. A lot of the savings that we see increasing in the economy have gone to certainly the higher income part of the distribution. That's because of a voluntary saving or people are worried about the pandemic, which leads to involuntarily saving more. Individuals wanting to spend, would’ve gone on vacation or gone to a restaurant, but they can’t because of restrictions.

So in that sense, income is piling up among that population that should be released as some restrictions are lifted. I would expect to see that type of pent-up demand not generate too much in the way of additional demand for credit. The other side of the case however, is certainly a different situation. Those savings rates really live more paycheck to paycheck each week. That is the part of the population that even as the economy recovers is not going to have any use. Maybe those savings have been exhausted and therefore any spending is going to have to be credit financed.

Should there be concern that the current FICO scores are not as reliable as FICO scores, pre-pandemic? If no, why not?

Tom Aliff: I would say that from a predictiveness standpoint, we have seen that the scores are very reliable and that most models are still performing very well. If we look back on the scenarios that we forecasted with those models heading back into multiple months ago, we can provide to the person that asked that question the specific analysis that we’ve done from a simulation standpoint, that shows that the predictive statistics do not deteriorate. What would happen is if accounts stay in accommodation for a much longer time period and move to the USA 24-months time period. Then those consumer scores would not be necessarily as reliable. That is why it's important to know which consumers or businesses have been impacted by any form of accommodation status or employment. We would then be able to address and manage it accordingly.  


Why does employment data look at "nonfarm" data? What is the significance of that?

Amy Crews Cutts: This is a long standing data series, starting in 1938. The reason they do not include agricultural jobs is that the data is not part of the business cycle. That is why this data is considered so important. The work on farms is seasonal, and it matters for sure, but it is not going to indicate whether the economy is growing or slowing (though it may see a fall in demand during recession). But, the actual reason is not easily found (I looked).

Why are we noticing that salaried incomes dropped more so than hourly incomes? Is this not contradictory to the K-shaped recovery idea?

Tom Aliff: Salaried incomes were decreased more due to furloughs than decreases for hourly employees. Many hourly employees outright lost jobs at a higher rate versus a decrease. The tables show wage income for anyone that still is employed. Mainly to show that unemployment statistics will not capture all the income disruptions.  

Mortgage and Lending

Will there be an adverse impact on housing valuation once the pent up foreclosure actions flood the market?

Amy Crew Cutts: I do not believe so. Inventories of homes for sale are very low, leading to higher home values with the still strong demand. This means most homeowners are building equity and will not want to go to foreclosure sale. If they really can't afford the home any longer they will sell to capture the equity they have built up.

How are hardship programs affecting metrics we are looking at with regard to delinquency trends (e.g., forbearance and other deferment concessions)? What would these charts look like if these loans were included in metrics?

Amy Crew Cutts: The shares of accounts and balances in accommodation are reported weekly by Equifax on the Market Pulse website.  Bottom line is of course higher, but accommodations have been declining in recent months.

Regarding the growth of delinquent amounts, would we likely see interest accruing across the entire timespan associated with any moratoria or forbearance?

Amy Crew Cutts: It depends on the terms of the accommodations. Federally backed student loans do not accrue interest on the deferred amounts. Some included deferrals would be special financing deals with no payment due for some period or no interest due until a time in the future. These are details that are not reported to consumer credit reports. For federally backed mortgages, the interest, and escrow for taxes and insurance, is still accruing. Borrowers have the option to roll that arrears amount into the balance due when the mortgage terminates. Therefore, keeping the payments level with pre-pandemic levels.  

Watch the January Market Pulse webinar for more economic predictions and employment insights. Access additional related insights and register for upcoming webinars on our Market Pulse web page.