Covid-19 lifted US finances, just not as we expected

Although her earnings dropped as she cut back hours to look after her children, company bonuses and a federal stimulus test put extra money in her pocket. She bought shares just before the market roared back this spring and refinanced her mortgage as interest rates fell.

The coronavirus crisis unfolded in ways few would have expected. Bankers, advocates for consumers and, yes, journalists, assumed that when the economy collapsed in March, so would Americans’ finances. Many remembered how the last financial crisis hit millions of people off their feet.

This crisis is nothing like the last one. But, with the benefit of hindsight, it becomes clear how much the 2007-09 recession shaped the recovery of the coronavirus.

Then the government’s response led to a slow recovery that took years to take office. This time, faced with a bigger and faster economic shock, the government’s response expanded within weeks, delivering greater unemployment benefits and one-off stimulus control to more people. In many cases, recipients earned more money with the benefits than they did in their regular job.

So far, Americans on average have done pretty well. They paid off credit card debt and saved more. Their net domestic value rose to record highs, aided by stocktaking. Their credit values ​​have risen.

However, the encouraging statistics hide an increasing inequality in the economy. Millions of Americans have no job and are facing permanent job losses. More people are going hungry. Hundreds of thousands of small business owners have closed the store.

“The averages are certainly true, but there are many people who are more vulnerable,” said Ray Kluender, a professor at Harvard Business School who studies financial distress in households. “They definitely tended in the wrong direction.”

The recent crisis – and the lessons learned from it – provided the basis for the response.

When financial markets plummeted in March, the Federal Reserve unleashed a series of monetary stimulus measures inspired by the earlier crisis – but bigger and faster. These programs have sustained large corporations and added a helping hand in the return of the stock market to record highs.

The lifeline and stimulus of the last crisis prompted Congress to act quickly when the pandemic struck. Then the aid is aimed at businesses – namely banks and car manufacturers – which are collapsing. Help for consumers has largely come through tax cuts, widespread unemployment and food stamps.

This time, lawmakers rushed to get money from almost every American and a wider range of cases. The government cut the checks, further expanded unemployment benefits and wrote forgiving loans to small businesses. The $ 2 billion stimulus package in March boosted the economy when businesses and consumers could not.

The government has also offered homeowners voluntary mortgage lending – up to a year of interrupted payments – possibly because it supports most home loans made in recent years. This made it possible to create a housing image in 2008.

Banks and other financial institutions were the villains of the last crisis, and are accused of inflating the housing bubble. This time they were eager to look like the good guys. They have developed plans to help lenders break down debt payments and waive fees and other charges for a while.

They were in a better position to offer those benefits. Tight regulations imposed after the financial crisis forced them to limit the risk and build up strong reserves of capital to deploy when an emergency occurs.

Many consumers have also changed. They were burned by the bubble in the residential property market a dozen years ago, and they have now managed their money more carefully. According to Fair Isaac, the average credit score gradually increased and continued to rise as the recession took hold. Corp.

Around 2008, Mrs. Rogers, the Walmart employee, retired from a marriage that left her and her ex-husband in debt. She grew up poor and sometimes used a neighbor’s house to shower, she said. Saving money was not a focal point. “I’ve been in a financial crisis my whole life,” she said.

After the divorce, she gave priority to paying off her credit card debt and building up her savings. By 2010, she had set aside enough for a down payment of a home where she lives with her partner and children.

Years of financial self-control found her strong in March. The optical department of Walmart where she works is temporarily closed, but she goes to the pharmacy. When the shares collapsed, she opened investment accounts for her children. She refinances her mortgage in late spring and gets a 20-year loan with an interest rate of just over 3%.

Financially, the crisis did not affect me too much, except that I was able to utilize things, ‘said Mrs. Rogers said.

Bank executives noticed shifts in customer savings and spending habits in the checking and savings account data.

During the last crisis, people used stimulus checks and tax cuts to make big purchases like TV sets and cars. But when this crisis hit, much more was measured. For those who increased spending, it was often for everyday items such as food and home improvement. It helped that Americans had fewer places to spend. Eat-in restaurants and entertainment venues are closed. Travel was off the table.

“People took more responsibility for using the money for what it was intended for – let me reduce the risk, pay off debt,” says Mary Mack, who works for Wells Fargo & Co. management.

It was one of Joe Ormiston’s first moves. He lost his job as a bartender when the sushi restaurant Nashville, Tennessee, where he worked, closed in March and then closed permanently. Extensive unemployment benefits, plus a stimulus test, almost replaced his income.

After the government benefits came through, he stopped using his credit card and paid his $ 600 balance. He does not want the debt to hang over him during an uncertain time. “If I do not have a job, do not know what is going on, it is at least something I can control,” he said.

Families who lost jobs but received government benefits fared fairly well in the first few months of the recession, according to a JPMorgan Chase & Co. Institute analysis of the bank’s account and credit card information. Initially, the balance on the bank account increased, but the average household spent much of the funds as the pandemic continued and the unemployment benefits lapsed during the summer. The lower their income in 2019, the more their balances decreased.

After the extensive benefits of mr. Ormiston expired, dropping its weekly unemployment check to about $ 250 a week. It recently stopped completely. He spent about a quarter of the $ 20,000 he saved on a mortgage on a home and used his credit cards again. Because he found it difficult to get a new job, he joined the Navy Reserve. Boot camp starts early next year.

While consumer purchases have increased over the past few months, the local spending pattern has not returned to normal. One example: spending dropped the most in the wealthiest neighborhoods as workers sequestered at home, according to John Friedman, an economist at Brown University.

Robert Brett Apparel, a menswear store in Fox Point, Wis., Felt the shift. Normally, a steady stream of executives and financiers come into the Milwaukee area for personalized suits, pants and sports jackets. Even during the financial crisis, people still had to dress. But since March, the calendar has been mostly empty.

“It’s a whole different thing in terms of how serious and absolute it was,” said Bob Richards, the store’s owner and sole employee. “Can you spend money on something you do not really need and that you are definitely not going to use for a while?”

Mr. Richards received a salary protection loan and a government grant. But he had to close his shop window; he will continue through direct sales. His family of five donated savings and his retirement account. They have a tolerance on their mortgage and pull out their groceries.

It is not clear where the Americans’ finances are headed. Congress recently passed, and President Trump on Sunday night signed another stimulus package that gives people an extra $ 300 a week in unemployment. Many will also receive $ 600 stimulus tests, and moratoriums on evictions will be extended until the end of January. The small business loan program will reopen.

If unemployment rises longer than the stimulus goes, the dividing lines of the economy could deepen, said Peter Ganong, a professor of public policy at the University of Chicago.

“We could end up in an unforced error in a way similar to the Great Recession,” he said. Ganong said.

Write to Ben Eisen by [email protected]