Pub. 8 2020 Issue 2

15 The Community Banker recession, borne from the coronavirus pandemic, constituted an ex- ogenous shock causing widespread financial disruption within every sector of the U.S. economy, as opposed to concentrated imbalanc- es. As public health authorities continue to relax social distancing measures in the upcoming months, the U.S. economy is likely to rebound, with businesses and consumers once again free to operate with fewer restrictions. The unique causal dynamics of this recession provide much cre- dence to our calculations indicating a short recession and quick recov- ery, but they also hint at the probability of a more severe contraction as well. Because social distancing measures have pressured revenues via decreased business activity, employment has become the primary concern and consequence of this pandemic as companies seek to shore up additional capital. Figure 2 demonstrates the severity of this recession as weekly unemployment claims filed within the first three months were 12 times higher than during the 2008 financial crisis. Because the coronavirus recession has caused financial disruptions in every sector of the economy, we can expect more severe declines in household income and consumer spending, given its acute effect on employment. The expected extent of this pain is still ambiguous, in keeping with this year ’ s theme of economic uncertainty, but will be unevenly distributed among localities, inducing a spotty recovery that varies between states and counties in timing, speed and effect. Two factors that will have an outsized influence on their recovery will be the ongoing public health threat posed by the coronavirus and localities ’ financial position prior to the recession. Counties and states that had a healthy circulation of income between consumers and businesses prior to the recession will be well-positioned to weather a protracted crisis and recover at a quicker pace. Figure 3 examines the average monthly income deficit by state, cal- culated as the average monthly wages lost from rising unemployment offset by state and federal unemployment benefits in April. Despite robust protections for unemployed workers, 28 states experienced an income deficit, while extended unemployment provisions implement- ed by the CARES Act, which are set to expire by the end of next month, provided a vital lifeline to 34 states by enabling them to recoup more than 50% of the difference. Because each state is in a unique position concerning mitigation of the coronavirus pandemic and consequent economic injury, there will not be a synchronized national recovery, and certain states will need additional assistance to fully heal. As the Coronavirus Recession reaches its four-month mark, we continue to receive more data that provides greater clarity to the good, bad and ugly of this contraction. On one hand, this recession will likely be much shorter than its predecessors, given its origins as an exogenous, noneconomic shock. But the financial pain inflicted on consumers and businesses will also set records in severity, while the path to economic recovery is akin to geographic roulette, making for a disjointed and spotty return to normalcy. Many unknowns remain concerning the United States ’ eventual road to recovery, most of which depend on the ability of public health authorities to contain this outbreak via testing at a meaningful level until the development and distribution of a vaccine. In the meantime, we know that commu- nity banks continue to be a vital component to the recovery equation. Community banks were the most prevalent conduit for small businesses seeking lifelines in operating capital via the Paycheck Figure 1: ICBA’s U.S. Economic Growth Forecast (Source: ICBA) 2.9 1.1 3.1 2 2.1 2.1 -5 -27.3 -10.6 -3.7 0.8 1.9 -30 -25 -20 -15 -10 -5 0 5 Q32018 Q42018 Q12019 Q22019 Q32019 Q42019 Q12020 Q22020 Q32020 Q42020 Q12021 Q22021 Change in Real GDP ICBA ’ s forecast indicates a V-shaped contraction and recovery. Figure 2: Weekly Unemployment Claims between the 2008 Financial Crisis and Coronavirus Recession (Source: U.S. Department of Labor) The expected extent of this pain is still ambiguous, in keeping with this year’s theme of economic uncertainty, but will be unevenly distributed among localities, inducing a spotty recovery that varies between states and counties in timing, speed and effect. Two factors that will 0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 8,000,000 #1 #2 #3 #4 #5 #6 #7 #8 #9 #10 #11 #12 # of Unemployment Claims Week Unemployment c laims during the Coronavirus Recession were 12 Times Higher than those during the 2008 Financial Crisis . Coronavirus Recession 2008 Financial Crisis 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% MA WV MN NJ HI CT OR ND CO VT SC PA MT KY OK NV UT NM VA NY KS OH IL IA AR CA ID ME NE NH MD TN WI IN DC WY DE AK WA GA MI NC SD MO FL TX AL LA MS AZ RI Despite r obust u nemployment b enefits, 28 s tates e xperienced a m onthly i ncome d eficit due to i ncreased u nemployment . State Unemployment Benefits Federal Unemployment Benefits Average Monthly Income Deficit Figure 3: Net Average Monthly Income Deficit after State and Federal Unemployment Benefits (source: U.S. Bureau of Labor Statistics & U.S. Department of Labor) As the coronavirus recession reaches its four-month mark, we continue to receive more data that provides greater clarity to the good, bad and ugly of this contraction. On one hand, this recession will likely be much shorter than its predecessors given its origins as an exogenous, noneconomic shock. But the financial pain inflicte on consumers and businesses will also set ecords in severity, while the path to economic recovery is akin to geographic roulette, making for a disjointed and spotty return to normalcy. Many unknowns remain concerning the United States’ eventual road to recovery, most of which depend on the ability of public health authorities to contain this outbreak via testing at a meaningful level until the development and distribution of a vaccine. In the meantime, we know that community banks continue to be a vital component to the recovery equation. Community banks were the most prevalent conduit for small businesses seeking lifelines in operating capital via the Paycheck Protection Program, issuing nearly two-thirds of PPP funds, whi h were critical for mitigating fur her increases in unemployment and supplying h u eh lds with much-needed income to weather declines in liquidity due to decreased business activity. A Figure 4 shows, states with a higher shar of community banks received more PPP funding during the early stages of the current recession, with the top 10 states able to cover 20% more of their payrolls than the bottom 10 states. In addition, by perfor ing their most basic functions, from accepting deposits to providing loans, community banks have been vital pillars of support to Main Street by facilitating a healthy circulation of capital to keep local economies in operation while social distancing mea ures have gone int effect. As show in Figure 5, community banks posted major gains in deposits and loans during the first three months of this recession. CONTINUED ON PAGE 16