Garnet Capital Advisors Blog

June 3, 2020

Unemployment Remains High and a Drag on the Economy and Recovery

EXCERPT:  As banks, credit unions, and other finance companies move what limited employees they have into customer service roles to aid in pandemic relief, many institutions are selling legacy underperforming or nonperforming assets to focus on borrowers in short-term stress today, but who are likely to financially recover and catch-up quickly.

The US labor force is seeing record-high numbers of unemployment benefit applications as millions lose their jobs as a result of the coronavirus pandemic.

Millions of American workers who have lost their jobs over the course of the coronavirus pandemic continue to file for unemployment in droves. The pace of unemployment applications continues to be high, although with new filings dropping, with another 2.4 million Americans filing for unemployment benefits over the past week on a seasonally adjusted basis, according to the Department of Labor.

That's a total of 38.6 million people applying for unemployment assistance since mid-March when nationwide lockdowns and stay-at-home orders were initially put into place.

Unemployment Claims Remain High, Though Pace is Slowing

The number of American workers off the job has reached record highs. Yet while claims are an ongoing trend for the foreseeable future, the pace of weekly claims has somewhat weakened since late March when the peak reached 7 million.

Most states saw fewer new applications for unemployment benefits over the past week. States like Georgia, Kentucky, and New Jersey have seen particularly sharp declines occur, and many states have reported fewer layoffs in the first week of May in places like health care firms and restaurants.

Self-Employed and Contractors Need to Be Accounted For

Having said that, the numbers we have may not be an entirely accurate reflection of what's happening with the labor force in terms of lost earnings. The total number of filings do not include the hundreds of thousands of self-employed and freelance workers who have applied for temporary financial assistance.

Leaving these numbers out means the actual total number is higher since the federal government started implementing temporary coronavirus pandemic unemployment assistance in late March.

The COVID-19 pandemic has sparked a surge in filings for unemployment benefits, though the pace may be slowing since its peak in March.

This particular unemployment assistance program will provide some insight into a workforce that is negatively affected by recessions. Such numbers will provide valuable insight into what is actually happening in the workforce as a whole.

Each state has been paying out unemployment benefits to newly qualified individuals - like self-employed people and independent contractors - over recent weeks. As of this past week, 43 states were paying out these types of benefits.

Auto and Credit Card Payments Skipped in Record Numbers

In April, lenders saw almost 15 million credit cards in financial assistance programs, such as deferral programs that allow borrowers to stop making payments temporarily, according to TransUnion. That's about 3 percent of the credit-card accounts that TransUnion tracks. At the same time, almost three million auto loans were in these programs, comprising approximately 3.5 percent of those the company tracks.

That's a big jump from the same time last year when 0.03 percent of credit cards and 0.5 percent of auto loans were in these financial-hardship programs.

While deferring payments isn't ideal for either borrowers or lenders, such an arrangement allows lenders to avoid a surge in delinquencies and charge-offs over the short term. This flexibility will give the economy more time to recover and consumers to get back on their feet.

Financial Institutions Encouraged to Focus on Short-Term Assets

Lenders can only handle unpaid loans for so long, after which a slew of defaults may eventually ensue that will lead to a ton of write-offs.

Unemployment has been affecting just about every facet of the economy, including financial institutions that have seen their fair share of layoffs. But customer service continues to remain an integral part of operations. Banks and credit unions are moving what limited employees they still have into customer service roles to help deal with financial relief amid the pandemic.

In the meantime, many financial institutions are selling off legacy underperforming or nonperforming assets and are shifting their focus on borrowers in short-term stress today who will likely recover financially in a short period of time. Garnet Capital can help facilitate these types of transactions to develop more robust loan portfolios that can weather economic crises such as the current one we are in.

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