Economic Update: Warning Signs Demonstrate Need for Further Stimulus

When it first became clear that the US economy had entered a recession due to the coronavirus pandemic, some experts hoped that the recovery would take the form of a “V” – an abrupt decline in economic activity followed by a just-as-swift recovery, resulting in minimal lasting damage. While others were skeptical that such a recovery would take place, economic data from May and June seemed to reflect that this best-case scenario was indeed occurring. However, as we move into the third quarter of 2020, there are signs that the recovery is slowing and perhaps even reversing. Accounts receivable management (ARM) companies must monitor these developments in order to stay ahead of the curve and keep their strategic planning as up-to-date as possible.

As stated previously, the economy appeared to be on a path towards a V-shaped rebound. March and April were disastrous; state lockdowns and uncertainty regarding the spread and effect of the coronavirus froze consumer demand, devasted industries like restaurants and retail, and led to millions of layoffs.

May and June, on the other hand, saw much stronger results than expected. Total nonfarm employment, which many economists predicted to fall by as much as 7.5 million jobs, rose by nearly 2.7 million in May and 4.8 million in June according to the latest release from the Bureau of Labor Statistics. These figures represent the two largest increases in nonfarm employment on record. Consumer spending, meanwhile, rose by 8.2% in May, after falling by 12.6% in April, according to the Bureau of Economic Analysis. Beyond these general indicators of improving economic health, certain segments of the economy that were hit particularly hard by the coronavirus have shown signs of recovery. For example, retail and food service providers, which were forced to severely limit or even fully suspend their operations in the early days of the pandemic, saw their sales rise by 18.5% in May and 7.5% in June month-over-month.

Source: Kaulkin Ginsberg & Department of Labor

Unfortunately, there are signs that the recovery has stalled in recent week as coronavirus cases soared. For example, weekly first-time unemployment insurance claims – which is used as a barometer for unemployment – rose in mid-July for the first time since late March. This comes even at a time when headline unemployment is higher than it was at the peak of the Great Recession. In addition, the University of Michigan consumer confidence index, which takes the temperature of how consumers feel about their own financial situation and the general economic situation, declined by 7.2% in July. If consumers feel less secure, then they are less likely to go out and spend money, which cools economic output.

One of the biggest points of concern going forward is the lack of further government stimulus in the face of worsening conditions and the expiration of previous programs. At the end of July, the $600-a-week boost to unemployment benefits facilitated by the CARES act expired, meaning that those who have been able to comfortably meet their financial obligations with the boosted benefits may begin to struggle. The federal moratorium on evictions also ran out at the end of July, and, according to a recent Census Bureau survey, 33% of renters have little-to-no confidence that they’ll be able to meet their next payment.

These trends should be somewhat alarming for the ARM industry. Consumers who have lost their financial lifelines are less able to pay even a fraction of what they owe when in collections, and evictees are harder to locate and contact.

With the economic recovery losing momentum and government support running out, the onus is on Congress to pass new stimulus. Experts like Chicago Federal Reserve President Charles Evans assert that “if we go very long without somehow addressing the reduction and evaporation of that support… that would be very costly for the economy.” Though the Trump administration sought to get a second round of stimulus passed in the first week of August, negotiations between top Cabinet officials, Congressional Democrats, and certain Republicans have stalled. ARM firms should keep an eye on the progress of the second stimulus round – if a new bill is not signed by even mid-August, there could be dire implications for the economy.

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