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How Household Debt Threatens the Recovery

The COVID-19 pandemic is having a disproportionate impact on the health of low-income Americans, but even those low-wage workers who avoid the disease…



The COVID-19 pandemic is having a disproportionate impact on the health of low-income Americans, but even those low-wage workers who avoid the disease itself are likely to suffer grave economic distress

In part, that is because workers with lower incomes have been more likely to lose their jobs than those who are better paid. The Pew Research Center reports that 32 percent of upper-income adults say that someone in their family has lost a job or taken a pay cut due to the outbreak. That compares with 42 percent of middle-income households who report lost jobs or pay cuts, and 52 percent of low-income households.

But pay is only part of the story. To fully understand the disparate economic impact of the pandemic, we need to look also at household wealth, or more exactly, net worth. The margin by which assets exceed household liabilities is crucial to a household’s ability to weather a job loss or a pay cut without catastrophic effects. And household net worth is not only less equally distributed than income — it is also frighteningly fragile for those in the bottom half of the population. That fragility is a major threat to hopes for a speedy economic recovery, as we will see.

Prosperity at the top, fragility at the bottom

Let’s look at some data. Figure 1 shows trends in the net worth of U.S. households from 1990 to the end of 2019, as reported by the Federal Reserve. All numbers are adjusted for inflation using the consumer price index. 

We see from the top line in Figure 1 that the top 1 percent of U.S. households have done very well, increasing their net worth by 167 percent over the past three decades. Those with middle incomes (51stto 90th percentile) and upper-middle incomes (91st to 99thpercentile) have not done badly, increasing their wealth by 52 and 91 percent, respectively. But those in the bottom half of the population have not done well at all. Their average real net worth has actually fallen by 24 percent since 1990. And keep in mind, we are not talking just about the 12 percent or so of the population who are officially poor. We are talking about the entire bottom half of the population.

In fact, you can’t really see what is going on with that group from Figure 1, since the blue line representing low-wealth households lies right flat along the horizontal axis. There’s an easy way to fix that. Figure 2 shows the same data replotted on a logarithmic scale to show more detail on changes in the net worth of the bottom 50 percent.

Consider, in particular, the effects of the downturn of 2008-2009 — a downturn popularly known as the “Great Recession,” although it may soon lose that title, since the one we are entering now is likely to be greater still. In the last recession, the top 1 percent lost 27 percent of their real wealth, as measured from the best quarter before the crisis to the worst one during it. Since that time, they have recovered all of their losses and then some. The middle and upper-middle groups lost about 20 percent of their wealth in the recession, and they, too, had more than regained their losses by the end of 2019. In contrast, households in the bottom half were hit much harder, losing 87 percent of their net worth. What is more, by late 2019, they were still more than 20 percent short of their position before the recession began.

Should we conclude that the rich picked their assets well while the less-well-off made bad investments? Not really. For the most part, the difference between the wealthy and the rest lay not in the quality of their assets but in the size of their debts.

It’s all a matter of leverage

In financial circles, the relationship of a firm’s or household’s debts to other items on its balance sheet is known as leverage.If you owe a lot relative to what you own, you are said to be highly leveraged. If your debts are relatively modest, your leverage is said to be low. Leverage can be measured in several ways, but however it is done, the greater your leverage, the greater the fragility of your financial position if the value of your assets fall or that of your debts increases. 

According to Monica Prasad, consumers tend to be more leveraged in countries that have relatively weak social safety nets and easy access to consumer credit. Figure 3 shows that is true for the United States, at least for those in the bottom half of the wealth distribution.

As we see, American households in the middle, upper-middle, and wealthiest groups have consistently maintained moderate leverage. However, in the bottom half have long  been more highly leveraged, and increasingly so over time.

Although the assets of middle- and upper-wealth households decreased in value during the last recession, their debt ratios remained well under control. Not so for the bottom 50 percent. As the value of their assets fell, their debt ratio, which was high to begin with, moved perilously close to the red line of insolvency. In the worst quarter of the Great Recession, the averagedebt ratio for the bottom half was 96 percent. Although the Fed’s data don’t allow us to calculate the number exactly, it is clear that a large fraction of the bottom half of the population were technically insolvent at the bottom of the last recession. 

To understand what is likely to happen during the recession that we are entering now, we should start with the fact that employment and output are dropping much more sharply this time than they did in 2008. What is more, the pattern of household assets and liabilities has changed, as shown in Figure 4.

The focus of the 2008 recession was the housing market. The big drop in the net worth of the bottom 50 percent, and the run-up in their debt ratios, was largely due to a decrease in home equity, to the point that it left many homeowners completely under water. After 2015, the value of housing increased, and mortgage debt rose also as households borrowed more against their increasingly valuable homes. However, neither real estate assets nor mortgage debt returned to their prerecession peaks. Going into the COVID pandemic, total mortgage debt owed by the bottom half was about 81 percent of their total real estate assets, leaving a reasonable cushion of equity.

Meanwhile, though, the recovery of household net worth has been undermined by a 25 percent increase in real consumer debt per household over the past decade. Such debt, which includes car loans, credit card balances, and student debt, constituted just 28 percent of all household debt in 2010. By the end of 2019, that had grown to 38 percent.

As the unemployment rate rises toward 20 percent and beyond, both household assets and liabilities will undergo further changes. On the asset side, it is likely that home prices will fall, although probably not by as much as during the last recession. Low mortgage rates will help sustain demand for homes and ease the pain for people with adjustable-rate mortgages. Also, most lenders are offering at least some degree of forbearance on missed mortgage payments, and there has been a moratorium on foreclosures for most mortgages. Those actions should reduce the number of forced home sales. 

Meanwhile, unemployed workers will be forced to run down their liquid savings (part of “other assets” in Figure 4b). Some may take advantage of a temporary reduction in penalties and make early withdrawals from pension plans. As of 2019, pension plans and other assets accounted for 20 percent of all household assets for those in the bottom 50 percent. People who are really pinched may resort to selling consumer durables such as furniture, boats, or sports equipment to make ends meet.

On the liabilities side, one of the first things people will do is max out their credit cards (part of “consumer debt” in Figure 4a). Many will take advantage of forbearance on mortgage payments and deferrals of rents, but although those will help their cash flows, they do not constitute debt forgiveness; the missed payments will still represent liabilities. Homeowners with federally insured mortgages are being allowed to let missed payments ride until they sell their homes or until their mortgages are paid off, but some private lenders are insisting that missed payments will have to be paid in a lump sum after only a few months. Much the same is true of student loans and car loans — the first- and second-fastest growing categories of consumer debt. Even if lenders agree to a delay in payments, the result will be a greater burden of liabilities.

Taking the impacts on assets and liabilities together, and considering that the peak unemployment rate in the COVID crisis is likely to reach twice the peak of 10 percent reached in October 2009, it is entirely possible that the average debt ratio for the entire bottom half of American households will exceed 100 percent before the economy fully recovers. 

Implications for the recovery

The COVID recession has had an unusually strong supply-side component. Output has been constrained by disruptions in global supply chains; by workers too ill or too fearful to report to their jobs; and most of all, by widespread stay-at-home orders. (See “The Coronavirus and the Economy” for details.) 

In recent weeks, much of the controversy over reopening the economy has focused on the supply side. Optimists hope that once stay-at-home orders are eased, the economy will bounce back quickly. As White House economic adviser Kevin Hassett put it, commenting on a mid-May uptick in the stock market, "I've been really positively impressed by how quickly things are turning around."

But the downturn also has an important demand-side component. Consumers have cut back sharply on their spending, not only because stores have been shuttered and restaurants closed, but also because their incomes have suffered. The optimists seem to assume that once regular paychecks are restored, consumers will go back to their free-spending ways. Skeptics have cast doubt on that, noting that many people will be fearful of riding on airplanes or sitting in restaurants while the virus is still circulating. Fear is certainly a concern, but it is not the whole story. A look at the balance sheets of households in the lower 50 percent suggests that it will be some time before even the most fearless of them are willing and able to spend freely.

Even when income starts coming in again, those households are going to place a higher priority on paying down debts and rebuilding savings than on discretionary spending. With maxed-out credit cards, they are going to be less tempted to drop in for a $5.25 venti salted caramel mocha latte on their way to the office, even if the office is open. They are going to think twice about a new car when the old one is still running well, and when there are missed payments to make up on the loan or lease. They are going to trailer their boat to the local lake for some fishing rather than rebook the cruise on which they luckily managed to get a refund when it was cancelled due to the virus. 

The result could be that stores and factories optimistically reopen, only to be forced into a new round of layoffs when customers fail to show up. If so, the result could be a W-shaped recovery, even if there is no second round of COVID cases as social distancing eases. A slow recovery is all too real a real risk for an economy in which half the population lives on the brink of insolvency even when times are good.

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Cruise Line Drops Pre-Cruise Covid Testing Rule

The major cruise lines walk a delicate line. They need to take the actual steps required to keep their passengers safe and they also need to be aware of…



The major cruise lines walk a delicate line. They need to take the actual steps required to keep their passengers safe and they also need to be aware of how things look to the outside public. It's a mix of practical covid policy balanced with covid theater.

You have to do the right thing -- and Royal Caribbean International (RCL) - Get Royal Caribbean Group Report, Carnival Cruise Lines (CCL) - Get Carnival Corporation Report, and Norwegian Cruise Lines (NCLH) - Get Norwegian Cruise Line Holdings Ltd. Report have been doing that with very meticulous protocols-- but you also have to show the general public you're taking the pandemic seriously. The cruise industry has been under the microscope of both public perception and the Centers for Disease Control (CDC) since covid first appeared.

That's not because you're likely to get infected on a cruise ship than at a concert, sporting event, theme park, restaurant, or any other crowded space. It's because when you get sick at one of those locations nobody can pinpoint the source of your infection

Cruises last from 3 days to 7 days or even longer and that means that some people will get covid onboard and that will be blamed on the cruise industry. To mitigate that Carnival, Royal Caribbean, and Norwegian have rigid protocols in place that require passengers 12 and over to be vaccinated as well as pre-cruise covid tests taken no more than two days before your cruise leaves.

Once cruise line has dropped that testing requirement (at least on a few sailings) and that could lead Royal Caribbean, Carnival, and Norwegian to follow. 

Sina Schuldt/picture alliance via Getty

Holland America Drops Some Covid Testing

As the largest cruise lines sailing from the U.S., Royal Caribbean, Carnival, and Norwegian don't want to be the first to make major covid policy changes. They acted more or less in tandem when it came to loosening, then dropping mask rules and have generally followed the lead of the CDC, even when that agency's rules became optional.

Now, Holland America cruise line has dropped pre-cruise covid testing on a handful of cruises. It's a minor move, but it does provide cover and precedent for Royal Caribbean, Carnival, and Norwegian to eventually do the same.

"Holland America Line becomes the first US-based cruise line to remove testing for select cruises. Unfortunately for those taking a cruise from the United States, the new protocols are only in place for certain cruises onboard the company’s latest ship, the Rotterdam, in Europe," Cruisehive reported.

The current CDC guidelines do recommend pre-cruise testing, but the cruise lines into following those rules. By picking cruises sailing out of Europe, Holland America avoids picking a fight with the federal agency just yet, but it will be able to gather data as to whether the pre-cruise testing actually helps.

Holland America has not changed its vaccination requirements for those cruises which mirror the 12-and-up rule used by Royal Caribbean, Carnival, and Norwegian.

Some guests have called for the end of the testing requirement because they believe it's more theater than precaution because people can test and then contract covid while traveling to their cruise.

The Current Cruise Protocols Work

Royal Caribbean President Michael Bayley does expect changes to come in his cruise line's covid protocols, and he talked about them during Royal Caribbean's recent President's Cruise, the Royal Caribbean Blog reported.

"I think pre cruise testing is going to be around for another couple of months," Bayley told passengers during a question and answer session. "We obviously want it to go back to normal, but we're incredibly cognizant of our responsibilities to keep our crew, the communities and our guests safe."

People do still get covid onboard despite the crew being 100% vaccinated and all passengers 12 and over being vaccinated, but the protocols have worked well when it comes to preventing serious illness.

Bayley said that the CDC shared some information with him in a call.

"The cruise industry sailing out of the US ports over the past 12 months and how many people have been hospitalized with Covid and how many deaths occurred from Covid from people who'd sailed on the industry's ships, which is in the millions," he said, "And the number of people who died from COVID who'd sailed on ships over the past year was two."

That success may be why the major cruise lines are reluctant to make changes. The current rules, even if they're partially for show, have been incredibly effective.

"Two is terrible. But but but against the context of everything we've seen, that's it's truly been a remarkable success." he added.

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Tesla Rivals Challenge Its Lead as Nio Sets Encouraging Record

Tesla’s rivals are not even coming close to producing and delivering EVs at the same rate as the Austin, Texas-based market leader.



Tesla's rivals are not even coming close to producing and delivering EVs at the same rate as the Austin, Texas-based market leader.

Electric vehicle makers have been struggling over the last two years to produce and deliver cars, trucks and SUVs despite obstacles such as supply chain disruptions, semiconductor shortages and factory shutdowns caused by the covid pandemic.

The industry's leading EV manufacturer Tesla  (TSLA) - Get Tesla Inc. Report on July 2 said that plant closures at its Shanghai gigafactory in April and May and supply chain disruptions led to a smaller number of deliveries than expected in its second quarter ending June 30 with 254,695, which was 26.7% higher than the same period in 2021, but 17.7% lower than its record of 310,048 delivered in the first quarter of 2021. Analysts were originally expecting about 295,000 deliveries.

Tesla's production declined to 258,580 vehicles in the second quarter compared to 305,407 in the first quarter. It had produced 305,840 vehicles in the fourth quarter of 2021.

Tesla's rivals are not even coming close to producing and delivering EVs at the same rate as the Austin, Texas-based market leader. But they keep trying.


Tesla Rivals Struggle to Produce and Deliver Volume of EVs

Tesla rival Nio  (NIO) - Get NIO Inc. American depositary shares each representing one Class A 蔚来汽车 Report on July 1 said that it had delivered 12,961 vehicles in June for a 60.3% year-over-year increase and its highest number of monthly deliveries ever. The company also reported 25,059 EVs delivered in the three months ending June 2022, increasing by 14.4% year-over-year. Nio has delivered a cumulative 217,897 EVs as of June 30.

NIO on June 15 rolled out its ES7, a new mid-large five-seat smart electric SUV, which is the first SUV product based on NIO's latest technology platform Technology 2.0. NIO also launched the 2022 ES8, ES6 and EC6 equipped with the upgraded digital cockpit domain controller and sensing suite, enhancing the computing and perception capabilities as well as digital experience of the vehicles. The company expects to start deliveries of the ES7 and the ES8, ES6 and EC6 in August.

Chinese EV maker XPeng  (XPEV) - Get XPeng Inc. American depositary shares each representing two Class A 小鹏汽车 Report on July 1 said it delivered 15,295 vehicles in June, a 133% increase year-over-year; 34,422 in the second quarter ending June 30 for a 98% increase year-over-year and 68,983 in the first six months of the year for a 124% increase year-over year.

The Guangzhou, China-based company said in August it will begin accepting orders for its new G9 SUV with an official launch in September.

Beijing-based Li Auto  (LI) - Get Li Auto Inc. Report on July 1 said it delivered 13,024 EVs in June, a 68.9% increase year-over-year and 28,687 in the second quarter ending June 30 for a 63.2% increase year-over-year. The company on June 21 began taking orders for its Li L9 SUV and recorded 30,000 orders as of June 24, according to a statement. Test drives will begin July 16 with deliveries beginning by the end of August.

GM Follows Behind Tesla and Other Rivals

General Motors  (GM) - Get General Motors Company Report had 7,300 EV sales in the second quarter, according to a July 1 statement. The Detroit automaker's sales included deliveries of the BrightDrop Zevo 600 delivery van, GMC Hummer EV pickup, and the resumption of the Chevrolet Bolt EV and Bolt EUV production.

GM said the Cadillac Lyriq production is accelerating, with initial deliveries in process. Orders for the 2023 model year sold out within hours and preorders for the 2024 model opened on June 22.

The company said it will gradually increase production of the Cadillac Lyriq and GMC Hummer EV Pickup in the second half of 2022. 

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Spread & Containment

Tesla EV deliveries fall nearly 18% in second quarter following China factory shutdown

Tesla delivered 254,695 electric vehicles globally in the second quarter, a nearly 18% drop from the previous period as supply chain constraints, China’s…



Tesla delivered 254,695 electric vehicles globally in the second quarter, a nearly 18% drop from the previous period as supply chain constraints, China’s extended COVID-19 lockdown and challenges around opening factories in Berlin and Austin took their toll on the company.

This is the first time in two years that Tesla deliveries, which were 310,048 in the first period this year, have fallen quarter over quarter. Tesla deliveries were up 26.5% from the second quarter last year.

The quarter-over-quarter reduction is in line with a broader supply chain problem in the industry. It also illustrates the importance of Tesla’s Shanghai factory to its business. Tesla shuttered its Shanghai factory multiple times in March due to rising COVID-19 cases that prompted a government shutdown.

Image Credits: Tesla/screenshot

The company said Saturday it produced 258,580 EVs, a 15% reduction from the previous quarter when it made 305,407 vehicles.

Like in other quarters over the past two years, most of the produced and delivered vehicles were Model 3 and Model Ys. Only 16,411 of the produced vehicles were the older Model S and Model X vehicles.

Tesla said in its released that June 2022 was the highest vehicle production month in Tesla’s history. Despite that milestone, the EV maker as well as other companies in the industry, have struggled to keep apace with demand as supply chain problems persist.

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