Covid-19 changed Americans’ finances, but not in the way we expected

Although her earnings fell when she cut hours to care for her children, company bonuses and a federal stimulus check put extra money in her pocket. It bought shares just before the market shot up this spring and refinanced its mortgage as interest rates plummeted.

The coronavirus crisis unfolded in ways that few could have expected. Bankers, consumer advocates and, yes, journalists, assumed that when the economy collapsed in March, Americans’ finances would go, too. Many remembered how the last financial crisis brought down millions of people.

This crisis has nothing to do with the last one. But, with the benefit of hindsight, it is becoming clear how much the 2007-09 recession has influenced the coronavirus recovery.

Then, the government’s response led to a slow recovery that took years to establish. This time, in the face of a bigger and faster economic shock, the government’s response came in weeks – giving more people greater unemployment benefits and one-time stimulus checks. In many cases, beneficiaries earned more money from benefits than in their regular jobs.

So far, Americans have, on average, done very well. They paid credit card debt and saved more. Their families’ net worth reached record levels, helped by the increase in shares. Your credit score has gone up.

However, these encouraging statistics mask an increasingly uneven economy. Millions of Americans are out of work and facing permanent job losses. More people are going hungry. Hundreds of thousands of small business owners have closed their doors.

“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 domestic financial problems. “They are certainly trending in the wrong direction.”

The latest crisis – and the lessons learned from it – set the stage for the answer to this.

When the financial markets went crazy in March, the Federal Reserve unleashed a series of monetary stimulus measures inspired by the previous crisis – but to a greater and faster extent. These programs have kept big companies solvent and helped the stock market return to record highs.

The bailouts and stimuli from the latest crisis have set the stage for Congress to act quickly when the pandemic arrives. So aid was directed at companies – that is, banks and automakers – that were on the verge of collapse. Aid to consumers came largely through cuts in payroll taxes, rising unemployment and food stamps.

This time, lawmakers rushed to get money for almost every American and a wider range of businesses. The government cut checks, further expanded unemployment benefits and provided forgiving loans to small businesses. The $ 2 trillion stimulus package in March sustained the economy when businesses and consumers failed.

The government has also offered homeowners generous mortgage tolerance – up to a year of payment breaks – made possible because it finances most home loans made in recent years. This allowed it to prevent a 2008-style housing crisis.

Banks and other financial institutions were the villains of the last crisis, accused of inflating the housing bubble. This time, they were eager to look like the good guys. They launched plans to help borrowers pause debt payments and waive fees and other charges for a while.

They were in a better position to offer these benefits. Strict regulations imposed after the financial crisis forced them to reduce risk and build up robust capital reserves to deploy in an emergency.

Many consumers have also changed. Burned 12 years ago by the bubble in the housing market, they now managed their money more prudently. The average credit score has steadily increased and has continued to rise as the recession set in, according to Fair Isaac Corp.

By 2008, Ms. Rogers, a Walmart employee, was leaving a marriage that left her and her ex-husband in debt. She grew up poor and sometimes used a neighbor’s house to bathe, she said. Saving money was not the focus. “I have been through a financial crisis my entire life,” she said.

After the divorce, she prioritized the payment of credit card debt and the accumulation of savings. In 2010, she set aside enough to pay for a house, where she lives with her partner and children.

Years of financial constraint left it in a strong position in March. The optics department at Walmart where she works effectively closed temporarily, but she was transferred to the pharmacy. When the stock plummeted, she opened investment accounts for her children. She refinanced her mortgage in late spring, taking out a 20-year loan with an interest rate of just over 3%.

Financially, the crisis “hasn’t affected me much, except being able to take advantage of things,” said Rogers.

Bank executives noted changes in customers’ savings and spending habits in current and savings account data.

During the last crisis, people used stimulus checks and tax incentives to make big purchases, like TV sets and cars. But when this crisis hit, many were more restrained. For those who increased spending, it was usually for everyday items like food and home improvement. It helped that Americans had fewer places to spend. Restaurants and entertainment venues were closed. Traveling was out of the question.

“People have taken responsibility for using the money for what it was intended – let me reduce the risk, pay off debts,” said Mary Mack, who runs the consumer bank at Wells Fargo & Co.

This was one of Joe Ormiston’s first moves. He lost his job as a bartender when the sushi restaurant Nashville, Tennessee, where he worked closed in March, then closed permanently. The increase in unemployment insurance, plus a stimulus check, has practically replaced your income.

After government benefits arrived, he stopped using his credit card and paid off his $ 600 balance. He didn’t want the debt to hang over him for an uncertain period, he said. “Not having a job, not knowing what’s going on, at least is something I can control,” he said.

Families who lost jobs but received government benefits did very well in the first months of the recession, according to an analysis by JPMorgan Chase & Co. Institute of bank account and credit card data. Initially, bank account balances increased, but the median family spent a lot of these funds as the pandemic dragged on and expanded unemployment benefits expired in the summer. The lower the revenue in 2019, the more the balance fell.

After Ormiston’s expanded benefits expired, his weekly unemployment check dropped to about $ 250 a week. It recently stopped completely. He spent about a quarter of the $ 20,000 he was saving for a house payment and is using his credit cards again. Finding it difficult to get a new job, he enlisted in the Navy Reserve. The camp starts early next year.

Although consumer purchases have increased in recent months, localized spending patterns have not returned to normal. One example: spending fell further in the wealthiest neighborhoods, as white-collar workers were kidnapped at home, according to John Friedman, an economist at Brown University.

Robert Brett Apparel, a men’s clothing store in Fox Point, Wisconsin, felt the change. Normally, a steady stream of executives and financiers from the Milwaukee area arrived to buy custom suits, pants and sports jackets. Even during the financial crisis, people still needed to dress well. But since March, the calendar is almost empty.

“It’s a completely different thing in terms of how severe 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 are definitely not going to use for a while?”

Mr. Richards obtained a loan from the Salary Protection Program and a grant from the state. But he had to close his shop; it will continue through direct sales. His family of five is digging up his savings and his retirement account. They have achieved tolerance on their mortgages and are stretching their groceries.

It is not clear where Americans’ finances are going. Congress passed recently and President Trump signed another Sunday stimulus package that gives unemployed people an extra $ 300 a week. Many will also receive $ 600 stimulus checks, and eviction moratoriums will be extended until the end of January. The small business loan program will be reopened.

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

“We may end up making an unforced mistake in a similar way to the Great Recession,” said Ganong.

Write to Ben Eisen at [email protected]