Certain aspects of the economy look remarkably strong almost 10 months into the coronavirus pandemic, resembling Donald Trump’s hoped for “V” shaped recovery.
The stock market is hitting all-time highs, corporate profits are better than expected, and real estate prices hit a 14-year high in October. But a granular look at the economy suggests what we’re really experiencing is a “K” shaped recovery.
For people on the upper arm of “K,” things are going well. These are people who can work at home with no disruption in their income and have investments that continue to do well for them. They are saving money—$1 trillion, according to one estimate—because they can’t spend it on fancy restaurants or trips to Europe.
People on the lower leg of the “K” tend to have jobs that can’t be performed at home, do public-facing work that is more likely to expose them to COVID-19, and have little in the way of savings and other assets they can utilize if they lose work or get sick.
These people have been kept afloat by the CARES Act that provided the one-time stimulus checks of $1,200, the short-term $600 a week boost in unemployment insurance, 13 additional weeks of unemployment benefits, and moratoriums and other protections that are soon to expire.
For starters, nearly 12 million workers will lose federal unemployment benefits on Dec. 26 if Congress fails to reauthorize the payments. That will be followed shortly by the end of various moratoriums on mortgage payments, rent, student debt, utilities, credit cards and other debt.
At least 25% of renters are in arrears, and many of them will owe at least six months worth of rent come January. About 20% of Americans have less than $400 in the bank, according to a survey by the U.S. Federal Reserve. You do the math.
Most of that money is owed to mom-and-pop landlords, who have mortgage payments, taxes and other bills arriving on a monthly basis. They will have little choice come January but to start eviction proceedings; otherwise, they will be in default on their mortgages.
Home owners are in the same predicament. About 1.06 million borrowers are past due by at least 30 days on their mortgages and not in a forbearance program, according to mortgage-data firm Black Knight, Inc.
Another 250,000 of the six million borrowers who were in forbearance at one point since the pandemic began are again delinquent on their loans, according to Black Knight. They tend to be among those with lower incomes and weaker credit scores—the people on the lower leg of our “K” recovery.
Of course, forbearance doesn’t last forever and the accumulated debt eventually comes due. The sharks on Wall Street realize this and are already circling their prey.
The country’s two largest home landlords, Invitation Homes Inc. and American Homes 4 Rent, grew out of the housing bust of 2008. Backed by big investors, they scooped up thousand of houses at foreclosure prices and turned them into rental units.
Both companies see similar opportunities again. American Homes 4 Rent, which owns about 53,000 houses, has stockpiled more than $1 billion through loans and a stock sale to increase its inventory of houses as people lose theirs. Invitation Homes is buying about $200 million worth of houses about every three months.
Then there’s the issue of utilities. Since the pandemic started, 36 states issued moratoriums on utility shut-offs for people who couldn’t pay their bills. In other states, utility companies voluntarily stopped disconnecting customers who fell behind.
But that forbearance is ending. An estimated 24 million households have lost their protection since October as moratoriums ended in nine states (they had already expired in 14) leaving 13 in place, according to Carbon Switch, an energy efficiency startup.
But moratoriums are double-edged swords, particularly for the low income and poor. If they last until spring, some customers could have a year’s worth of unpaid bills that they will never be able to pay. Payment plans to avoid shut-offs often require customers to pay a portion of the past-due bill on top of the current bill, not practical for many people unemployed since the pandemic started.
Moratoriums on credit card and other personal debt will end in the new year, creating a cascading affect that will dampen the growth of the economy. A political deadlock in Washington probably means no help will arrive anytime soon.
Congress is deadlocked over the size of any new aid packages—Democrats want a big one, Republicans don’t. Trump isn’t likely to push for a deal before he leaves office, and the Biden administration will have to deal with a likely Republican Senate that is in no mood to add to the $5.6 trillion in debt racked up during the Trump administration.
New COVID-19 vaccines are on the horizon, but the latest spike in the disease will create more than collateral damage to the economy before the vaccine turns the tide late next year. The recovery is starting to stall as unemployment claims rise and consumer sentiment falls. COVID-19 cases are increasing at 2.5 times the rate of the summer surge.
All of this will fall into the lap of the Biden administration, which won’t be ready to hit the ground running Jan. 20 if Trump doesn’t start cooperating on a smooth transition of power. Joe Biden saw this movie in 2009 after the George W. Bush administration handed Barack Obama an economic mess.
None of this will make life better any time soon for the Americans on the lower leg of our “K” economy. As the Century Foundation, a left-leaning think tank, concluded in a recent analysis:
“Without unemployment benefits and with savings badly depleted, families will be at high risk of food insecurity and loss of their homes…The nation’s entire economy will suffer.”
Happy New Year.