Liberty Street Economics

May 27, 2021

COVID‑19 and Small Businesses: Uneven Patterns by Race and Income

Ruchi Avtar, Rajashri Chakrabarti, Davide Melcangi, Maxim Pinkovskiy, and Giorgio Topa

The COVID-19 pandemic resulted in one of the sharpest recessions and recoveries in U.S. history. As the virus spread over the country in a matter of weeks in March 2020, most states rapidly locked down nonessential economic activity, which plummeted as a result. As the first wave of COVID-19 subsided and people gradually learned to “live with the virus,” states reversed most of the initial lockdowns and economic activity rebounded. In our ongoing Economic Inequality series, we have explored many aspects of how the economic turmoil associated with COVID-19 differentially affected households. Here, we turn to small business experience. The first post in this three-part installment seeks to understand if there was variance in small business activity across counties that differed by income and race. In two companion posts, we investigate the experience of small businesses in terms of credit access, looking at characteristics of who received and who benefited from the Paycheck Protection Program (PPP). The analysis finds inequalities in PPP credit access as well as differences in the loan and recipient county characteristics for those who received loans through financial technology (fintech) providers versus other lenders.

Posted at 10:45 am | Permalink

May 26, 2021

The Overnight Drift in U.S. Equity Returns

Nina Boyarchenko, Lars C. Larsen, and Paul Whelan

Since the advent of electronic trading in the late 1990s, S&P 500 futures have traded close to 24 hours a day. In this post, which draws on our recent Staff Report, we document that holding U.S. equity futures overnight has earned a large positive return during the opening hours of European markets. The largest positive returns in the 1998–2019 sample have accrued between 2 a.m. and 3 a.m. U.S. Eastern time—the opening of European stock markets—and averaged 3.6 percent on an annualized basis, a phenomenon we call the overnight drift.

Posted at 7:00 am in Euro Area, Financial Markets, International Economics, Stocks | Permalink

May 21, 2021

Is the United States Relying on Foreign Investors to Finance Its Bigger Budget Deficit?

Thomas Klitgaard

The fiscal packages passed in 2020 and 2021 to help the economy cope with the pandemic caused a dramatic increase in federal government borrowing. One might have expected that foreign investors were important buyers of this new debt, but that was not the case. They were instead net sellers of Treasury securities. Still, the amount of money flowing into the United States increased last year, which helped fund the government’s borrowing, if only indirectly. The upturn in inflows, though, was quite modest as a surge in domestic personal saving largely covered the government’s heightened borrowing needs. How the reliance on foreign funds changes in 2021, when the government deficit will again be quite elevated, will depend on whether domestic personal saving remains high.

Posted at 7:00 am in Fiscal Policy, International Economics | Permalink | Comments (1)

May 20, 2021

Consumer Credit Demand, Supply, and Unmet Need during the Pandemic

Jessica Lu and Wilbert van der Klaauw

It is common during recessions to observe significant slowdowns in credit flows to consumers. It is more difficult to establish how much of these declines are the consequence of a decrease in credit demand versus a tightening in supply. In this post, we draw on survey data to examine how consumer credit demand and supply have changed since the start of the COVID-19 pandemic. The evidence reveals a clear initial decline and recent rebound in consumer credit demand. We also observe a modest but persistent tightening in credit supply during the pandemic, especially for credit cards. Mortgage refinance applications are the main exception to this general pattern, showing a steep increase in demand and some easing in availability. Despite tightened standards, we find no evidence of a meaningful increase in unmet credit need.

Posted at 7:00 am in Credit, Expectations, Housing, Pandemic | Permalink

May 19, 2021

What’s Next for Forborne Borrowers?

Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klaauw

We’ve spent the first three posts of this series discussing who has entered mortgage forbearance, and how their personal finances have developed during the course of the pandemic. In this fourth and final post, we will use Consumer Credit Panel (CCP) data to examine the profiles of those who remain in forbearance and those who have exited, and how the performance of household credit may evolve as the force of the pandemic begins to ebb and the economy reopens and normalizes.

Posted at 11:48 am in Pandemic | Permalink

Small Business Owners Turn to Personal Credit

Andrew F. Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klaauw

In our first post in this series we showed that mortgage provisions under the CARES ACT and its subsequent extensions resulted in a rapid take-up of mortgage forbearances, under which borrowers had the option to pause or reduce debt service payments without inducing a delinquency notation on their credit reports. Here we examine the forbearance take-up rate of a group of mortgage borrowers we expect to have been particularly hard hit by the pandemic recession: small business owners. Relatively little is known about how small business owners have fared over the past year in terms of their personal finances. Were they able to continue making mortgage payments on their homes? Did they draw on home equity to help fund their business operations?

Posted at 11:47 am | Permalink

What Happens during Mortgage Forbearance?

Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klaauw

As we discussed in our previous post, millions of mortgage borrowers have entered forbearance since the beginning of the pandemic, and over 2 million remain in a program as of March 2021. In this post, we use our Consumer Credit Panel (CCP) data to examine borrower behavior while in forbearance. The credit bureau data are ideal for this purpose because they allow us to follow borrowers over time, and to connect developments on the mortgage with those on other credit products. We find that forbearance results in reduced mortgage delinquencies and is associated with increased paydown of other debts, suggesting that these programs have significantly improved the financial positions of the borrowers who received them.

Posted at 11:46 am in Household Finance, Housing, Inequality | Permalink

Keeping Borrowers Current in a Pandemic

Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klaauw

Federal government actions in response to the pandemic have taken many forms. One set of policies is intended to reduce the risk that the pandemic will result in a housing market crash and a wave of foreclosures like the one that accompanied the Great Financial Crisis. An important and novel tool employed as part of these policies is mortgage forbearance, which provides borrowers the option to pause or reduce debt service payments during periods of hardship, without marking the loan delinquent on the borrower’s credit report. Widespread take-up of forbearance over the past year has significantly changed the housing finance system in the United States, in different ways for different borrowers. This post is the first of four focusing attention on the effects of mortgage forbearance and the outlook for the mortgage market. Here we use data from the New York Fed’s Consumer Credit Panel (CCP) to examine the effects of these changes on households during the pandemic.

Posted at 11:45 am in Banks, Credit, Financial Institutions, Housing, Pandemic, Recession | Permalink

May 17, 2021

How Does U.S. Monetary Policy Affect Emerging Market Economies?

Ozge Akinci and Albert Queralto

The question of how U.S. monetary policy affects foreign economies has received renewed interest in recent years. The bulk of the empirical evidence points to sizable effects, especially on emerging market economies (EMEs). A key theme in the literature is that these spillovers operate largely through financial channels—that is, the effects of a U.S. policy tightening manifest themselves abroad via declines in international risky asset prices, tighter financial conditions, and capital outflows. This so-called Global Financial Cycle has been shown to affect EMEs more forcefully than advanced economies. It is because higher U.S. policy rates have a disproportionately larger impact on rates in EMEs. In our recent research, we develop a model with cross-border financial linkages that provides theoretical foundations for these empirical findings. In this Liberty Street Economics post, we use the model to illustrate the spillovers from a tightening of U.S. monetary policy on credit spreads and on the uncovered interest rate parity (UIP) premium in EMEs with dollar-denominated debt.

Posted at 7:00 am in Exchange Rates, Financial Markets, International Economics, Monetary Policy | Permalink

May 13, 2021

Who’s Ready to Spend? Constrained Consumption across the Income Distribution

David Dam, Davide Melcangi, Laura Pilossoph, and Will Schirmer

Spending on goods and services that were constrained during the pandemic is expected to grow at a fast pace as the economy reopens. In this post, we look at detailed spending data to track which consumption categories were the most constrained by the pandemic due to social distancing. We find that, in 2019, high-income households typically spent relatively more on these pandemic-constrained goods and services. Our findings suggest that these consumers may have strongly reduced consumption during the pandemic and will likely play a crucial role in unleashing pent-up demand when pandemic restrictions ease.

Posted at 7:05 am in Equitable Growth, Household Finance, Inequality, Pandemic | Permalink

Markets & Policy Implementation

Liberty Street Economics

COVID‑19 and Small Businesses: Uneven Patterns by Race and Income

The Overnight Drift in U.S. Equity Returns

Is the United States Relying on Foreign Investors to Finance Its Bigger Budget Deficit?

Consumer Credit Demand, Supply, and Unmet Need during the Pandemic

What’s Next for Forborne Borrowers?

Small Business Owners Turn to Personal Credit

What Happens during Mortgage Forbearance?

Keeping Borrowers Current in a Pandemic

How Does U.S. Monetary Policy Affect Emerging Market Economies?

Who’s Ready to Spend? Constrained Consumption across the Income Distribution

Economic Inequality

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