The Pandemic Boom: The Upside of Down

Typically, during an economic downturn, households see their financial fortunes fall. Incomes are lost, debt service payments are missed, and assets are repossessed. The global financial crisis of 2008 was particularly debilitating, with unemployment rising to ten percent, with personal bankruptcies skyrocketing.

This has been a different sort of recession. Inexplicably, credit scores rose a statistically significant amount during the recession, from 703 to 711. Most people had the ability to work from home, and since they weren’t going out and spending money in stores and restaurants, they saved, paid down debt, and repaired their household balance sheets, resulting in credit scores rising. For the minority of people who lost their jobs, government stimulus helped get them through.

Tony Greer, founder of TGMacro Research, detailed how his expenditures went down dramatically during the pandemic. “There were no 4-figure concert ticket daisy cutters landing on the Amex statement, and our restaurant bill went nearly to zero.” That experience was repeated millions of times throughout the economy.

Likewise, bankruptcies actually dropped 22% from 2019 to 2020, according to legal service firm Epiq. It’s an old saw that the repo man has his best business during recessions — this time, there were fewer cars to repossess, because people continued making their payments. If you think about the financial crisis, and the wave of foreclosures that we experienced, none of that happened during the pandemic. It is safe to say that people’s financial situation was actually better off. Anytime you see people saving money and paying down credit cards, you have to be happy about that.

There are many sources of stress that people experience — but financial stress is about the worst. And one main source of financial stress is debt. Car payments, mortgage payments, credit card payments, and student loan payments. For millions of people, this is a constant source of worry — the average household’s financial situation is often quite fragile. All it takes is an accident, illness, or injury to result in lost income — and the house of cards comes tumbling down.

The silver lining of the pandemic is that it permanently changed consumption patterns. People got used to eating at home, cutting their own hair, and eliminating frivolous expenditures, saving hundreds of dollars each month. Early in the pandemic, the savings rate jumped to over 30% — this highest in recorded history. It has settled in at around 13%, which is still well above the historical average of around 8%. The money saved, in many cases, went to an emergency fund, designated for pet illnesses, lost jobs, and the check engine light.

But in this particular case, the money saved was directed towards paying down debt — credit cards, in particular. Consumer credit balances dropped dramatically, with the resultant increase in credit scores. The average family spends a lot of money on debt service. The average credit card balance in the United States is $6,270, and the average credit card interest rate is 19%. That means that the average household spends $1,200 in credit card interest over the course of the year — 4% of income, a staggering amount. 2020 was the year that consumers massively deleveraged, cutting their debt dramatically.

Going forward, the outlook is not as optimistic. There are signs that Americans are returning to their spendthrift ways. It is starting to look like that people will travel in unprecedented numbers in 2021, after the vaccines are fully distributed. Airfares have already gone up a lot, and they will continue to go up more, as demand for flights outstrips supply. The major airlines took a lot of capacity offline during the pandemic, furloughing pilots and flight attendants, and parking planes in the desert. It will take some time to bring that capacity back online, and it will take financial incentives, which will be passed along to the traveler.

The summer of 2021 is shaping up to be one to remember. People will party hard — we’ll see hedonism we haven’t seen in decades. And if interest rates stay low (which they might not), we’ll once again see big-ticket purchases of cars, toys, and houses. All of the work that people did during the pandemic has the potential to be reversed. We’re already starting to see a little bit of inflation in pockets of the economy, mostly in food and building aggregates. Inflation will continue to rise, as people spend the money they saved in 2020. We could end up back where we started.