Who the K-shaped recovery is leaving behind

The K-shaped economic recovery — a staple of U.S. news coverage and commentary since late last year — is relatively a novel concept.

Following previous recessions, economists typically described recoveries as either V-shaped, meaning that that growth resumed quickly, or U-shaped, which signified that output remained low for a longer period of time before rebounding.

The K-shaped recovery is shorthand for a pandemic-era economy in which Americans’ financial fates diverged. Many people in white-collar jobs fared quite well due to government stimulus payments, increased saving and a boom in the price of many assets, including homes, while many folks with service-sector jobs suffered.

The uneven U.S. recovery will likely have important implications for banks and other lenders. For example, with many renters suffering, lenders to small landlords have been preparing for losses for months.

The slides that follow illustrate various ways that the pandemic has exacerbated existing economic inequality. Small-business owners in minority communities, low-income minority families and people with subpar credit scores are among those that have borne more of the brunt of the economic damage from COVID-19.

Minority families

The double whammy of job losses and a scramble for child care when schools closed hit certain vulnerable groups particularly hard.

Low-income Black and Latinx families and women of color

saw the fastest depletion of their cash

balances during the pandemic, according to a recent analysis by the JPMorgan Chase Institute.

Not only did women of color make up a disproportionate share of workers in industries, like leisure and hospitality, that were hit hardest by COVID-19, they were also more likely to be single heads of a household.

Because these groups also had lower starting account balances, they received larger proportional increases when stimulus payments hit their accounts, but the cash boost was shorter-lived, the JPMorgan Chase Institute found.

Minority small-business owners

The pandemic has hit small businesses harder in areas where minorities make up the majority of the population, according to a May report from a team of New York Fed researchers.

In so-called majority-minority counties, small-business revenues plunged by more than 40% early in the pandemic, compared with nearly 34% elsewhere, the

report

found.

Although small- business revenues rebounded quickly everywhere, growth in the majority-minority counties has lagged other parts of the country, according to the report, which relied on data from the local commerce platform Womply.

That disparity lines up with findings that minority-owned small businesses were

more likely

to shutter when the pandemic hit, the New York Fed researchers wrote. It is also consistent with another

study

that found that Paycheck Protection Program funds for small businesses took longer to reach minority communities, they added.

Atlanta Casts Light on Injustice for Black-Owned Small Business

Isaac Thomas stands outside his Atlanta-area Taekwondo studio, which closed permanently in 2020 due to the pandemic.

Bloomberg

People with low credit scores

As house prices have soared during the pandemic, homeownership has become less attainable for many families.

Between May 2020 and the same month a year later, prices nationally rose by 16.6%, according to the S&P/Case-Shiller Home Price Index. In certain cities, including San Diego and Phoenix, the increases exceeded 20%.

Given the rapid price appreciation, it makes sense that average credit scores for people receiving home loans has risen; it is hard for people with low credit scores to qualify for loans on expensive homes.

During the fourth quarter of 2019, 63.6% of mortgage originations went to borrowers with scores of 760 or higher, according to data from the Federal Reserve Bank of New York. By the second quarter of this year, that figure had risen to 71.6%.

And during the same six-quarter span, the share of mortgage originations that went to borrowers with credit scores of 659 or lower fell from 7.4% to 4.5%, according to the New York Fed data.

Renters

Heading into the spring of 2020, renters and mortgage holders were receiving unemployment insurance payments at about the same rate, according to data from the JPMorgan Chase Institute.

But when businesses began to shutter that March, the rates began to diverge, researchers said in a report released one year later.

An estimated 10% of renters were claiming unemployment insurance by June 2020, compared with less than 8% of mortgage holders, according to the report.

While the percentage of renters and mortgage holders who were claiming unemployment insurance claimants later declined, the gap between the two groups persisted at about 2 percentage points as of the end of last year.

The JPMorgan Chase Institute’s results mirrored a Census Pulse Survey released in January 2021 that found 59% of renters reported a loss of income during the pandemic, compared with 43% of homeowners.

Front-line workers

Front-line workers who earn less than $60,000 in household income face more financial challenges than non-front-line workers with similar earnings, and the pandemic may have exacerbated those challenges, according to an

analysis

of two surveys conducted last summer.

The analysis, conducted by the Financial Health Network, relied on a definition of front-line workers as being people who regularly come within six feet of others while doing their jobs.

Because front-line workers with low or moderate incomes were more likely than their non-front-line counterparts to contract COVID-19, they were more likely to be forced to stay home, resulting in lost wages, the analysis found. Those workers spent down their savings, reducing the emergency funds they had in place to shield themselves from future emergencies.

Some 29% of front-line workers with low or moderate incomes said their income declined, and 90% reported flat or higher expenses, according to the analysis. Among non-front-line workers with similar incomes, 21% said their incomes declined, and 85% reported flat or reduced expenses.

The analysis looked at 1,751 adults who were earning less than $60,000 in household income.