Covid-19 turned Americans’ finances upside down, just not in the way we expected

Although her earnings fell as she cut back hours to care for her children, corporate bonuses and a federal incentive check put extra cash in her pocket. She bought stocks just before the market slumped this spring and refinanced her mortgage when interest rates plummeted.

The coronavirus crisis has unfolded in a way that few could have expected. Bankers, consumer advocates, and yes, journalists assumed that Americans’ finances would too if the economy broke up in March. Many remembered how the last financial crisis toppled millions of people.

This crisis does not resemble the previous one. But in retrospect, it becomes clear how much the 2007-2009 recession shaped the coronavirus recovery.

The government’s response then led to a slow recovery that took years. This time, faced with a bigger and faster economic shock, the government’s response rolled out in weeks – bringing more people to larger unemployment benefits and one-off stimulus checks. In many cases, the recipients made more money from the benefits than from their regular job.

So far, Americans have done fairly well on average. They paid off credit card debt and saved more. Their net worth jumped to record highs, aided by the increase in inventory. Their credit scores went up.

Still, those encouraging statistics mask an increasingly uneven economy. Millions of Americans are out of work and are facing permanent job losses. More people are starving. Hundreds of thousands of small business owners have closed their stores.

“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 household financial problems. “They have certainly gone the wrong way.”

The latest crisis – and the lessons learned – set the stage for the response to it.

As the financial markets went into turmoil in March, the Federal Reserve unleashed a series of monetary stimulus measures inspired by the earlier crisis, but which were bigger and faster. Those programs kept large companies solvent and contributed to the stock market’s return to record highs.

The bailouts and incentives of the latest crisis prepared the pump for Congress to act quickly when the pandemic hit. Subsequently, the aid was aimed at companies – namely banks and car manufacturers – that were on the verge of collapse. Help for consumers came largely through cuts in payroll taxes, increased unemployment and food stamps.

This time around, lawmakers rushed to get money for nearly every American and a larger portion of the business. The government lowered controls, further expanded unemployment benefits, and issued forgiving loans to small businesses. The $ 2 trillion stimulus package in March supported the economy when businesses and consumers couldn’t.

The government also offered homeowners generous mortgage interest deductions – up to a year of deferred payments – made possible as they support most home loans in recent years. That enabled it to avoid a 2008-style landlord.

Banks and other financial institutions were the villains of the latest crisis, accused of blowing up the housing bubble. This time they wanted to look like the good guys. They rolled out plans to help borrowers interrupt their debt payments and waived fees and other costs.

They were in a better position to provide those benefits. Tight regulations imposed after the financial crisis forced them to mitigate risk and build robust capital reserves to deploy when an emergency hit.

Many consumers have also changed. Burned a decade ago by the bubble in the housing market, they were now more careful with their money. The average credit score had risen steadily, according to Fair Isaac, and continued to rise as the recession hit Corp.

Around 2008, Ms. Rogers, the Walmart employee, came out of a marriage that put her and her ex-husband into debt. Growing up in poverty, she sometimes used the neighbor’s house to shower, she said. Saving money was not a focus. “I’ve been in a financial crisis all my life,” she said.

After the divorce, she preferred to pay off her credit card debt and build up her savings. In 2010, she had set aside enough for a down payment on a house where she lives with her partner and children.

Years of financial restraint gave her a strong position in March. Walmart’s optical department where she works effectively has been temporarily closed, but she switched to the pharmacy. When stocks fell, she opened investment accounts for her children. She refinanced her mortgage in the late spring and got a 20-year loan at just over 3% interest.

Financially, the crisis had “not affected me so much, except that I could take advantage of things,” said Ms. Rogers.

Bank executives have noticed shifts in customers’ savings and spending patterns when checking and saving account information.

During the last crisis, people used incentive checks and tax breaks to make large purchases, such as televisions and cars. But when this crisis hit, many more were measured. For those who increased their expenses, it was often for mundane things like food and home improvement. It helped that Americans had fewer places to spend. Eat-in restaurants and nightlife will be closed. Travel was off the table.

“People took more responsibility for using the money for what it was meant to be – let me reduce risk, pay off debt,” said Mary Mack, who runs the Wells Fargo & Co. consumer bank. runs.

That was one of Joe Ormiston’s first moves. He lost his job as a bartender when the Nashville, Tennessee sushi restaurant where he worked closed in March and then closed permanently. Extensive unemployment benefits, plus an incentive check, pretty much replaced his income.

Once the government benefits came through, he stopped using his credit card and paid off his $ 600 balance. He didn’t want the guilt hanging over him in an uncertain time, he said. “Not having a job, not knowing what’s going on, at least it’s something I can control,” he said.

According to an analysis by the JPMorgan Chase & Co. Institute of the bank’s account and credit card information, families who lost their jobs but did receive benefits from the government fared reasonably well during the first few months of the recession. Initially, bank account balances increased, but the average household spent much of that money as the pandemic dragged on and extended summer unemployment benefits matured. The lower their income in 2019, the more their balance fell.

After Mr. Ormiston’s extended benefit expired, his weekly unemployment check dropped to about $ 250 a week. It has recently stopped completely. He’s spent about a quarter of the $ 20,000 he saved on a down payment for a house and is using his credit cards again. Having found it difficult to find a new job, he enlisted in the Navy Reserve. The boot camp will start early next year.

While consumer purchases have increased in recent months, local spending patterns have not returned to normal. For example, according to John Friedman, an economist at Brown University, spending fell most in the wealthiest neighborhoods because servants were segregated at home.

Robert Brett Apparel, a menswear retailer in Fox Point, Wisconsin, has felt the shift. Normally, a steady stream of Milwaukee-area executives and funders came in for tailored suits, pants, and sports jackets. Even during the financial crisis, people still had to change. But the calendar has been largely empty since March.

“It’s quite a different thing in terms of how strict and absolute it was,” said Bob Richards, the store’s owner and sole employee. “Can you spend money on something you don’t really need and definitely won’t be using for a while?”

Mr. Richards received a loan for the salary protection program and a state grant. But he had to close his shop front; he will continue with direct sales. His family of five has delved into savings and his retirement account. They have tolerance on their mortgage and are busy with their shopping.

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

If unemployment remains high for longer than the stimulus in place, the dividing lines of the economy could deepen, says Peter Ganong, a professor of public policy at the University of Chicago.

“We could end up in casual error in a way similar to the Great Recession,” said Mr Ganong.

Write to Ben Eisen at [email protected]