Speed is of the essence

mar. 16, 2020

No one stands in front of a house that’s going up in flames and says, “Hey I’ve got an idea: This would be a good time to add more fire hydrants along this street.”

Yet instead of taking rapid action to mitigate the consequences of a looming recession, we have a bill before the Senate that extends paid sick leave and mandatory family leave. Treasury Secretary Mnuchin appears to stand willing to help small businesses who face liquidity constraints with this additional burden, and measures are being taken by the SBA to coordinate with state governments to lend money to small businesses. 

Fire hydrants. 

As of 2017:Q4, the Census Quarterly Workforce Indicators data shows that around 11% of the US labor force works in Accommodation and Food Services (NAICS code 72). That industry is at a near standstill. Add in the 13% works in Retail Trade (NAICS code 44-45) and you’re at 25% of the US labor force who work in the kinds of businesses that just fell off a cliff. 

Right now we look like Italy did 11 days ago. We double the reported infection rate about every 48 hrs, and that’s in the midst of a criminally inadequate testing infrastructure. $H!T is about to get real.  

As I’ve said in an earlier post, many ordinary, middle-class households are ill prepared to handle a few weeks of economic disruption. Again, data from the 2017 FINRA Foundation National Financial Capability Study are illuminating.[1] Here are two charts that I think are worth thinking about: 

 

That’s right, 31% of households making 50-75K per year only paid the minimum balances, 13% got charged a late fee, and 7% got charged a fee because they exceeded their credit limit. 8% of them got a cash advance on a credit card. These are not poor households, these are households in the middle. 

Moreover, the poor have not cornered the market on being over-indebted. Take a look:

Those are income buckets along the bottom. 20% of households earning 75-100K per year strongly agree that they have too much debt right now. Many of them are about to have more. These calculations came from the survey data available from the FINRA survey website. It’s an amazing data source, and as I’ve said before, if you want to take a deeper dive into this, see the April 2018 report by Andrea Hasler, Annamaria Lusardi, and Noemi Oggero.[2] 

The IMF chief economist Gita Gopinath was quoted in the Financial Times earlier today as saying, “This should be a transitory shock if there is an aggressive policy response that can stop [it] morphing into a major financial crisis.” We certainly got that today. I hope she’s right, but my read of the NFCS data makes me think she’s wrong. I think her assessment overlooks the fact that many ordinary households will come out on the other side of this transitory shock in much weaker shape than they were before the pandemic occurred.  The effect this will have on consumption going forward could be dramatic. We will be feeling the effects of the coronavirus long after everyone is back to work.

[1] The National Financial Capability Study (NFCS) is a project of the FINRA Investor Education Foundation (FINRA Foundation).

[2] “Financial Fragility in the US: Evidence and Implications,” by Andrea Hasler, Annamaria Lusardi, and Noemi Oggero, April 16, 2018.