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The Current Outlook for Consumer Lending

Hands exchanging money.

When 2020 is in the rear-view mirror, economists will no doubt study the critical role American consumers played in the economic recovery.

On average, consumer spending represents more than 68% of gross domestic product in the United States. During the 2020 recession, it hit its low-water mark on March 30, when cumulative spending declined more than 33%, according to a study from Opportunity Insights.

The bulk of this activity was concentrated in a few key sectors. Personal services, restaurants, transportation, leisure activities, hotels, healthcare and apparel took the brunt of the initial economic shutdown. Grocery spending on the other hand, increased more than 74% by March 18.

The economic shutdown and the impacts it had on employment and spending is likely to result in significant changes for the consumer lending landscape in the year ahead. As consumer spending numbers continue their path toward recovery in the fourth quarter of the year, we look ahead to the impact the recession will have on lending activities.

The 2020 recession has been unique because of its COVID-19 virus origins. While it began in mid-February, spurred on by supply chain disruptions from China, it picked up most of its steam from nationwide economic shutdowns initiated in mid-March.

In addition to significant impacts on consumer spending, the economic shutdown put the brakes on an expansion of consumer lending in the US that had been ongoing since 2012. While long-term impacts are still unknown, the pandemic economy of 2020 will likely affect new loan generation as well as loan delinquencies and defaults throughout 2021.

Between March 14 and August 15, 2020, more than 57 million initial claims for unemployment benefits were filed. The unprecedented events of the year placed stress on a significant number of American workers.

But the numbers themselves don’t tell the complete story. The pandemic-related shutdown deeply impacted lower wage workers. Jobs paying less than $27,000 annually were reduced by 34% in mid-April and were still down by more than 17% in mid-August.

By comparison, jobs paying more than $60,000 a year declined less than 10% during the shutdown and were down less than 1% in mid-August. While nearly 60 million workers saw some interruption of their pay in 2020, more than 100 million experienced much less interruption.

Evidence of this trend shows up in the average US savings rate, which reached an unbelievably high 33% in April, according to the Bureau of Labor Statistics. The increase, while short lived, was partially the result of workers being at home while still fully employed, and partially due to stimulus funds and enhanced unemployment benefits for those who had been laid off. The bottom line is that the entire system of consumer income and spending experienced unprecedented changes between March and August of this year.

So how did all this activity affect consumer debt trends? The graphic below from the Federal Reserve shows debt levels through the end of the second quarter 2020. You can see the rising trend that began in late 2012. Also notice the slight contraction in most loan categories by the end of the most recent quarter, with the exception being mortgage loans. With historically low interest rates, mortgage activity spiked in late summer. That trend is likely to continue when third quarter results are published.


Total debt balance and its composition.


A review of consumer debt levels, however, is incomplete without analyzing age groups representing the debt. The following graphic shows the same level of total debt distributed across age ranges, with younger and older consumers holding less debt. Younger consumers on average hold more student loan and auto loan debt, as compared to others that hold real estate-related obligations. Younger consumers also make up more of the lower wage earners that saw significant unemployment throughout the shutdown.


Total debt balance by age.


While debt levels were rising from 2012 into 2020, the debt service capacity of the average consumer was improving. For that reason, delinquencies declined sharply across the same time period. In the graphic below, we see that decline, including a significant drop in the second quarter of 2020, due to forbearance and other loan accommodations.


Total balance by delinquency status.


So where do we go from here? The answer will depend on the path of the recession itself, and that will depend on our response to the virus. If unemployment continues to recover, we might see fewer long-term impacts.

Most agree that there will be an increase in delinquencies for all loan types, but the extent of those will depend on the underlying consumer economic picture, mainly income restoration. More than two-thirds of the American economy is fueled by the income, spending and savings activities of the 331 million citizens of our country.

At this point, all indications are that mortgage-related lending activities will continue to drive the consumer market in 2021, while other loan categories such as student and auto loans will decline.

At the same time, loan delinquencies will likely increase in the fourth quarter, primarily coming from those workers that saw the most significant pay interruptions. This will come as forbearance agreements and economic stimulus payments for lower wage earners expire, which for many started in early August.

For a more in-depth study of the American consumer, we invite you to review our latest white paper, The Jack Henry Lending 2020 Guide to American Consumers.

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