Yes, there is a pandemic silver lining
Many Americans are doing better financially
For months, Americans have barely dined at restaurants or traveled for vacation. There have been no ballgames or concerts to attend. Gym and other memberships mostly remain frozen.
Forced into lockdown mode by the coronavirus, people put big purchases on hold and scaled back their spending. Around the same time, mortgage lenders, student loan collectors and other creditors offered struggling borrowers a break on payments. And stimulus checks from the government arrived.
These trends have come together to form an unlikely silver lining to the economic recession, which set in eight months ago: Despite the pandemic’s economic devastation, which has tipped millions of people into unemployment, many American households are in relatively good shape. Since April, consumer savings have increased, credit scores have surged to a record high and household debt has dropped. The billions of dollars that banks set aside at the start of the crisis to cover anticipated losses on loans to customers have been largely untouched. And lending at pawnshops and payday lenders, where business tends to boom during downturns, has been unexpectedly slow.
‘‘Everything was upside down,’’ said John Hecht, an analyst at the investment bank Jefferies. Usually, in times of distress and unemployment, more people find themselves with deteriorating credit and are forced to seek high-interest, or subprime, loans, Hecht said, but not this year.
The pain might still be coming. Banks
and other consumer lenders are bracing for financial stress next year, as millions of people remain out of work and the labor market’s rebound shows signs of stalling. A third surge of coronavirus cases has taken hold in the United States, and lawmakers in Washington are mired in fights about the terms of additional stimulus.
The number of people in America living in poverty has grown by eight million since May – though their financial woes often aren’t captured by credit and loan data because they’re out of the financial mainstream. And longer-term consequences like wage stagnation, reduced entrepreneurship and the accumulated cost of interest-bearing debt could linger for decades.
But for now, households are weathering the turmoil largely because of the unusual nature of the downturn. The pandemic ended America’s longest economic expansion on record, meaning that people came into this recession in better shape than they were in when the Great Recession took root in 2008.
This time, too, the government’s rapid aid efforts blunted a bigger crisis. Expanded unemployment benefits, $1,200 stimulus payments and aid to small businesses had an immediate impact this past spring. Those who lost their jobs used the money to keep up with rent and other bills. Others used it to pay down debts, or socked it away in savings.
‘‘The quick, coordinated response of government stimulus and lender relief was unprecedented, and had a huge influence,’’ said Ethan Dornhelm, FICO’S vice president of scores and predictive analytics.
Since he lost his job as a toy designer in March, Daniel Brennan has been holding things together through a combination of aid money and loan relief programs. A six-month forbearance on federal student loan collections reduced his monthly expenses by $280.
Brennan, who is separated and had moved into his own apartment shortly before the pandemic took root, gave up that apartment and returned to the house he owns in Willow Grove, Pennsylvania., with his soon-to-be ex. Their mortgage lender, Wells Fargo, let them defer their payments until at least the end of the year. Because interest still accrues, that will increase the total amount they owe over the life of the loan. That break, though, has given Brennan enough cash flow to stay current on his car loan and credit card bills and buy essentials like groceries and gas.
Even as the swell in household liquidity provided by the government’s relief efforts starts to ebb and spending picks up again, creditors remain optimistic about consumers’ ability to keep up with their bills. The personal savings rate soared this spring, peaking in April, when Americans stockpiled $6.4 trillion — about a third of their disposable income. It has declined since, but stayed far higher than it was a year ago, according to the latest government data.
Credit card spending nose-dived, thanks in part to the reduced temptations of a locked-down economy.
The average American credit score has also steadily increased this year, reaching a record 711 in July, according to FICO.