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 and Mark Zandi answer 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 $2 billion 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.
Will two stimulus packages be needed to restore jobs and save businesses in 2021? One package now? One package in perhaps six months?
Mark Zandi: Well, I think given the election outcome, a divided government at this point, it feels like we're only going to get one package. The size of the package and what's in, it will depend on how strong or weak the economy is on the other side of the inauguration. When lawmakers get down to the business of putting that package together, it also depends on the pandemic and how that's fairing. Listen to Mark's full response: [playlist ids="21800"]
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.
Will the next and the next generations pay for national debt? And also, do you anticipate that there's any ceiling?
Mark Zandi: I think deficits in debt are a problem, but we've got a bigger problem right now and that's the pandemic. And if we don't use deficit financed fiscal policy to support the economy now, then we run the risk of the economy going back into recession, which would create even more serious fiscal problems for us. So we don't really have a choice. There's no good choice here. Listen to Mark's full response: [playlist ids="21802"]
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.
Regarding the V-shape recovery slide, I noticed the slope after 2023 is similar to the slip prior to the pandemic. Do you not think that there might be a permanent reduction in the growth rate of non-farm payrolls GDP?
Mark Zandi: No, I think that underlying GDP growth, which is a function of underlying labor force growth and productivity growth, will return to pre-pandemic levels. Labor force growth was a function of population growth and labor force participation. I think with a President Biden, we'll get a normalization in immigration policy, and that'll be stronger labor force growth that may be offset a little bit by lower labor force participation. But I think that's on the margin. And in terms of productivity growth, we have seen a recent surge in productivity because of the pandemic. Listen to Mark's complete response: [playlist ids="21806"]
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.
Is there a scenario projection where another large scale shutdown is seen throughout the U.S., and how would this affect the recovery?
Mark Zandi: Yes, you can see that now as the pandemic is intensifying, we're running close to 150,000 infections per day on a seven day moving average. Hospitalizations are increasing quickly and so are deaths. And it's forcing local and state officials to curtail business activity. And then, even if local officials don't impose new rules, people will self-quarantine to a greater degree. They're just nervous about getting sick. And so that will have impacts on spending and investment. Listen to Mark's full response: [playlist ids="21807"]
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.
Can you provide a quick view on commercial real estate office segments, which have been like a ghost town for nearly a year and will extend into next year, as well as reduced rent, terminated leases and stalled growth?
Mark Zandi: I think the commercial real estate market broadly defined -- I'm obviously going to paint with a broad brush here across markets and property types -- but generally CRE is a long-term casualty from the pandemic. You can see that obviously with online retailing. That was a dynamic in place before the pandemic, but it got supercharged by the pandemic. You can see it with the collapse in travel, and while tourism will come back eventually after the pandemic, I think business travel will be much impaired, longer run. You can see it in the high-end apartment, market luxury, living in big urban centers because people can work from home work from anywhere they're leaving bigger bin areas, given their long commutes high taxes, high cost of living, moving to other places. So that's hurting high-end apartments, those big towers that are in urban centers, and helping single family housing markets, as people move out to the suburbs excerpts in smaller cities. Listen to Mark's full response: [playlist ids="21804"]
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 FICO 8 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.
Does the data suggest the auto industry will have a surge in purchases for the 2021 year?
Mark Zandi: Yes. I think vehicle sales will be meaningfully stronger over the coming year. As we get to the other side of the pandemic, there's a fair amount of pent up demand that was created early on in the pandemic when sales were very low and people weren't out shopping for cars or anything else. And because people are working from home, they don't need cars. But, you know, once we're on the other side of the pandemic, and people are getting back to work, I think the demand for vehicles will revive.
Listen to Mark's full response: [playlist ids="21808"] For more economic predictions and analysis, watch the November Market Pulse webinar now.