The Weekly Briefing - September 14th, 2020

The Weekly Briefing – September 14th, 2020:

In This Week’s Brief:

  • Small Business Sentiment Improving Despite Headwinds
  • Labor Market Showing Signs of Improvement, but Further Obstacles Remain
  • Consumer Credit Markets Continue to Demonstrate Stability

Small Business Sentiment Improving Despite Headwinds

Real-time data from Track the Recovery suggests small businesses continue to face headwinds despite improving business owner sentiment and higher expectations for small business hiring. Total small business revenue as of August 9th registered at 19.1% below January levels, down from -14.3% for the week ending July 4th, which was the peak of the summer recovery. Small businesses in leisure & hospitality sectors continue to experience significant headwinds with revenues down 47.5% YTD.

While small business activity followed a steady and increasing path from mid-April to July 4th, a resurgence of the coronavirus in some states and resultant new restrictions likely impeded small business activity as the number of businesses open to customers also followed a small-but-steady downward trend during July and early August. The number of small businesses that are open now stands 19.1% below pre-pandemic levels with leisure & hospitality openings down 31.2%.

Despite the headwinds noted above, the National Federation of Independent Business’s (NFIB) Small Business Optimism Index rose 1.4 points in August, suggesting small business owners expect economic conditions to improve. The August reading came in at 100.2, slightly above the index’s long-run average.

In another positive note, the NFIB reports that the net share of firms expecting to add jobs in the next three months jumped three points in August to 21%. The figure marks a 20-point turnaround since April, and both construction and manufacturing firms reported especially strong employment growth. Continued positive small business sentiment is essential for the broader economic recovery as businesses with fewer than 500 workers account for nearly half of private sector payrolls.

Labor Market Showing Signs of Improvement, but Further Obstacles Remain

The labor market continued to show signs of improvement during July as the number of job openings increased and the pace of layoffs decelerated. Job openings rose by more than 600,000 to 6.6 million, compared to an average of approximately 7.0 million prior to the virus outbreak. And layoffs dropped to 1.7 million, marking an 85.2% decline since the March peak to slightly below pre-pandemic levels.

The pace of hiring did slow, however, falling from 7.0 million workers in June to 5.8 million in July, suggesting the labor market likely needs to register further improvements in order to make a more substantial dent in unemployment.

California in particular continues to experience depressed activity in the labor market with approximately 10 million individuals receiving unemployment benefits from conventional state and pandemic-related programs. The number of Californians receiving Pandemic Unemployment Assistance (PUA) benefits, which temporarily extend unemployment insurance to self-employed, free-lance, and independent workers affected by the pandemic, has surged from 3.1 million to 7.0 million during the two week period ending August 22nd. Prior to that period, PUA benefits had been averaging weekly increases of 4.7% from June through early August.

In addition, demand for labor has been much slower to recover in major Californian metros. In comparison to January levels, job postings in San Francisco and Los Angeles remain down 39.2% and 30.3%, respectively. The state as a whole has experienced a more modest decline of 21.6% over the same timeframe.

Consumer Credit Markets Continue to Demonstrate Stability

Consumer credit markets continue to hold steady as both the delinquency rate and the combined default/bankruptcy rate for consumer debt products have declined since the start of the pandemic. The overall delinquency rate for consumer products, which include auto, bankcard, home equity, and student loans as well as mortgages, stood at 1.2% in August compared to 2.5% in February. Meanwhile, the default/bankruptcy rate has dropped 42 basis points since February to 0.7%.

The mortgage sector in particular stands out as a bright spot in the consumer credit market with delinquency and default/bankruptcy rates at 1.0% and 0.2% respectively; both have dropped by half since February. Mortgages remain one of the few areas where new issuances have accelerated in recent months as households have taken advantage of record-low interest rates. Freddie Mac reports the average rate on a 30-year, fixed-rate mortgage dropped to 2.9% last week.

Stability in consumer credit markets owes in part to consumers who have demonstrated savvy by setting aside government aid as savings or using it to pay down loans. The Federal Reserve reports outstanding revolving credit—largely comprised of credit card spending—has registered five straight months of decline. As a result, revolving credit has dropped 9.1% since the start of the year.

At the same time, consumers have benefited from flexible repayment plans. reports that 5.5% to 8.0% of consumer loan balances are in forbearance, depending on the product type. In the absence of additional government support, continued stability in consumer credit markets could hinge on whether the ongoing jobs recovery can reach enough workers before lenders run out of patience.

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