Outlook 2021: Recovery Expectations

Market Pulse

In this episode of the Market Pulse monthly, we focus on the 2021 outlook for the U.S. economy and credit -- both consumer and small business. This transcription is edited for brevity. Listen to the full podcast for more great insights.

Theresa: How does the announcement of a vaccine nearing trial completion impact your outlook into 2021?

Cris deRitis: The announcement of the vaccine(s) is certainly a positive in terms of the economic outlook. It's going to help restore consumer confidence and business confidence. Just the fact that a vaccine exists, even if it takes some time to come to market and be fully distributed, is positive from a public health and a social perspective. The economic outlook is certainly an improvement to the trajectory of the forecast going forward. Of course, that does have to be tempered with the recent spike in the caseload. The sooner we get that vaccine distributed, the faster we'll be able to restore confidence and get the economy back on a more self-sustaining recovery path.

Theresa: With the continued pandemic-led uncertainty combined with our recent elections, what is the outlook on any additional stimulus? That's a topic we've touched on in previous podcasts, but what do you see as our outlook for additional stimulus now?

Cris deRitis: Stimulus, in terms of the short-term outlook of the economy, is critical. It's not a question of if we will get a stimulus, it's more a question of how much. It's very likely to come after the new Congress takes office, as well as after the new president is inaugurated. So, we're looking at a February timeframe at this point. The amount of stimulus is really dependent on the Senate. What happens with the elections in Georgia? If the Congress remains split, then we're looking at a smaller stimulus package -- perhaps closer to between $500 billion to a trillion dollars of support for households and small businesses. If the Democrats were to take control of the Senate along with the house, then it could be a much larger package. And, certainly that would have implications for the amount of growth we could expect both in terms of output and employment.

Theresa: In the latest quarterly Senior Loan Officer Opinion Survey, I noticed that there's a reference to continued tightening of loan underwriting standards by banks -- although far less in Q3 than we saw in Q2. Do you see that tightening continuing through Q4 and into 2021?

Cris deRitis: Yes, I do think banks will continue to remain on guard in Q4, and certainly as they look at the rise in COVID cases. That's front and center in terms of the outlook, at least in the short term. They may be encouraged by the announcement of the vaccine(s), but we have to wait and see what the actual path or trajectory of the vaccine is. There are going to be additional approvals, and we're going to need some time to actually have it distributed. On top of that, the stimulus is the big wild card when it comes to consumer credit. We are going to see defaults. It will likely be the result of inadequate stimulus or stimulus that is pushed out too far into the future. So, I do expect that banks will remain guarded, at least for the short term. And then as we go into Q1, and we start to see things hopefully improve at that point, they will be more willing to ease up on lending standards and provide additional credit support to the economy.

Theresa: Chris, what trends are you seeing in the consumer credit and lending data? Anything jumping out since our last podcast?

Chris Walker: Yes, a few things. Overall, debt is up about 0.8% when looking back to the pre-COVID period. And delinquencies have been steady overall for the last several weeks, with the last ten weeks at about 0.6%. And when we look at certain products like auto and first mortgage, they're very strong. Both of those products are up compared to the pre-COVID period. Auto is up about 1.9%. And most recently, we've been seeing a delinquency rise in auto. It's still well below the pre-COVID level, but we have been seeing that trend. Mortgages are up about 2.1%. So, very strong originations for both of those.

Theresa: David, let's shift to expectations for spend in the near term and into 2021. What are you seeing in the forecast?

David Fieldhouse: When we want to look at spend, retail sales is going to drive that overall. We are producing forecasts in that space. And I really think it's very relevant for credit data. Obviously, we saw a dip in the summer and then a bit of a rebound in Q3. So, retail spending overall is kind of back to the level it needs to be. And we're actually expecting a good Q4. There are bright spots. Spending is very strong in online stores. And we think there's a bit of a shift from services to goods overall. So, we're expecting an above average Q4 in terms of retail spending.

Theresa: We're going to shift gears now to the impact and outlook for small businesses. Sarah, what are you seeing in the indices lately for lending or delinquencies?

Sarah Briscoe: Delinquency is down overall. Nationally, lending is up overall since the pandemic start. Definitely, many pockets are struggling. We're seeing more positive trends in lending in the north of the country with decreases in lending in much of the rest of the country. Transportation is looking a bit better; it was elevated earlier in the year. Retail healthcare is still looking a little bit rough around the edges in terms of delinquency.

Theresa: You know we were talking with Cris earlier in the episode, around the spikes in COVID again. How might that impact small businesses today or as we look to 2021?

Sarah Briscoe: Based on previous spikes, we've seen that default rates consistently are increasing for states that have the most COVID cases. Texas, California, Florida and New York all saw high default rates corresponding to high COVID cases. I expect the trend will be similar for a renewed COVID-19 surge. Some businesses may now be better able to adapt now that they've experienced it once. But any businesses focused on travel, food or any high risk in-person service, will probably be impacted from the winter months and from COVID increases and business closures.

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