Thursday, March 3, 2022 | Bill Handel
Each year Raddon makes a series of predictions as to what the upcoming year will hold for both the economy and the financial services industry. Prognostication can be a dangerous business, and many prognosticators hope that the previous year’s predictions are simply relegated to the dustbin of history without further review. However, integrity compels us to review what we wrote, so here are the Raddon Predictions for 2021 made last January and an analysis of the accuracy of each.
What we said: GDP will grow between 3.5% and 4% for the full year 2021
“We believe the first quarter of 2021 will manifest slower growth, but the second half of 2021 offers the opportunity for significantly stronger growth as vaccines are rolled out and businesses open. The real challenge will be small business; a recent study by Harvard and Brown universities and the Bill and Melinda Gates Foundation showed that since January of this year (2020), the number of small businesses in the U.S. declined by 29%. The resiliency of small businesses will be tested in 2021.”
Analysis: Somewhat pessimistic
Growth in 2021 for the year exceeded 5.5%, the highest growth since 1984. Moreover, supply chain issues slowed down auto sales to such an extent that this alone reduced potential GDP growth by 0.3% in 2021. Its impact was felt in both the third and fourth quarters. We anticipated stronger growth in the second half of the year; this was true in the fourth quarter, but the third quarter was impacted negatively by the emergence of COVID variants.
However, our concerns regarding small business remain well-founded. Despite the strong overall economic growth in the second half of 2020 and all of 2021, the service sector of the economy remains at lower levels than before COVID. Since the fourth quarter of 2019, durable goods output is up 21% and nondurable goods output is up by 13%, but service sector output is down by 0.5%. Much of the small business economy operates in the service sector.
What we said: Unemployment will be between 4.5% and 5% by year-end 2021
“Unemployment is slightly under 7% now; to get to 5% by end of year 2021 will require a net gain of approximately 3.5 million people employed. While this is a large number, it is not unachievable. As recently as 2018, our economy had a net gain of 2.9 million people employed.
“Bureau of Labor Statistics data indicate that between January and April 2020, 25 million people lost employment. Since April, more than 16 million people have found employment. Set against these fluctuations, a gain of 3.5 million employed seems achievable – if economic conditions are conducive.
“Again, the key to whether this can be achieved is the recovery of small business. If small business owners are truly ‘serial entrepreneurs,’ then this result is possible and even probable.”
Analysis: Somewhat pessimistic
As of December 2021, unemployment was down to 3.9%, much lower than our prediction.
However, a significant reason for the much better news on unemployment has to do with labor force participation rates. In February 2020 – prior to the pandemic – the percentage of the adult population that was employed or looking for work was 63.4%. In December 2021, the percentage was 61.9%. Why does this matter? The unemployment rate is measured against the labor force participation rate; you are not counted as unemployed unless you are looking for work. A falling labor force participation rate will also result in a lower unemployment rate. If we had the same labor force participation rate in December 2021 as we had in February 2020, the unemployment rate would be over 6%.
Why have labor force participation rates declined so dramatically? One reason is the Great Retirement – the significant increase in retirement by baby boomers. However, declining labor force participation is seen in younger demographic groups as well. The bottom line is that while the unemployment picture is not as positive as the statistics would indicate, nearly 5 million more people had jobs in 2021 compared with 2020.
What we said: Home sales will be between 7.5 and 8 million units
“Home sales activity is being fueled by three factors. First is the millennial generation, second are low interest rates, third, the desire of many people to upsize or downsize, often a result of the pandemic. When you are working from home or teaching your children at home, the demand for more space is understandable.
“The level of home sales would compare with the level of sales seen each year from 2004 to 2006 and could lead one to believe we are heading back to the mortgage debt crisis that followed, ultimately leading to the Great Recession.
“While these home sales levels are high, there are several reasons to be less concerned this time. First, we have the demography to support this level of home sales activity. The millennial generation, as noted above, is 95 million strong, and these are the primary homebuyers of today. Gen Xers, who were the primary homebuyers 15 years ago, comprise only 61 million individuals. Second, there are significantly stronger levels of oversight on the mortgage market. Simply put, we cannot offer many of the high-risk mortgage loans that were written in the early 2000s, and these loans were direct contributors to the collapse of the mortgage market and economy.”
Analysis: Overly optimistic
Home sales totaled 6.9 million units in 2021, over 6% higher than in 2020. A slowdown in the second quarter of 2021, due in part to lack of housing supply, was a contributor to the miss. In fact, the major factor behind this miss was the lack of supply that, in turn, led to rapidly rising prices that impacted home affordability.
2022 will be a year of notable change for the housing market. The refinance boom is effectively over as the Federal Reserve begins to raise interest rates. However, home sales will continue up at a slightly elevated pace due to millennials still looking to get into home ownership as well as baby boomers looking to downsize/right-size.
What we said: Auto sales will be between 16.5 and 17 million units in 2021
“New auto sales in 2020 were slightly under 15 million units, almost 3 million units lower than the annual average sales for each of the previous five years. If you exclude March through July sales, we averaged closer to 16.5 million units for the year.
“We believe this is the level of auto sales activity we are likely to see in 2021. Auto sales have been steady since 2015 and are returning (somewhat slowly) to pre-COVID-19 levels. Low interest rates will boost auto sales throughout all of 2021.”
Analysis: Overly optimistic
Auto sales were just short of 15.5 million units. However, this was not an issue of lackluster consumer demand but was instead a supply chain issue. There simply were not enough new autos available to be purchased.
Evidence that consumer demand was not the issue is borne out by used vehicle sales. While new vehicle unit sales were 11% below pre-COVID levels in 2021, used vehicle sales were nearly 40% higher than pre-COVID levels. We were looking to buy cars but couldn’t find any new cars, so we purchased used vehicles instead.
What we said: Branch closures in 2021 will not be significantly accelerated over previous years
“Some of the thinking has been that one impact of COVID-19 will be an acceleration of the demise of branches. Amid the pandemic, it was easy to believe this could be true, and the accelerated adoption of banking technology – from mobile banking to video chat – has been truly remarkable.
“However, while we see branch closures continuing as they have done for the past 12 years, we don’t anticipate an acceleration of this trend in 2021. Financial institutions will look for ways in which to streamline operations and reduce expenses, but wholesale closures of branches would be counterproductive. In fact, a recent informal survey of Raddon clients indicated a significantly higher percentage intended to open new branches in 2021 than intend to close one or more.
“We do believe, however, that changes in layout and function of branches will accelerate in 2021. The massive adoption of financial technology by all generations during this pandemic accelerates the movement of the branch away from basic transactions toward a sales and service center.”
Analysis: On target
Preliminary data from the FDIC indicates that the rate of branch closure slowed slightly in the immediate months following the onset of the pandemic, but we do not expect this trend to continue. In fact, we anticipate a slight acceleration in branch closures in the coming years, due primarily to industry consolidation.
One interesting finding to note, however, is that the largest banks were more active in branch consolidation in 2021, with Huntington, Truist and US Bank leading the way – each reducing their branch counts by 12% or more. The “Big Three” (Chase, Bank of America and Wells Fargo) closed slightly more than 3% of their locations in 2021. Also, the credit union industry did experience a slight decline in total branch counts in 2021, something not seen previously.
What we said: Monthly mobile banking usage will surpass monthly branch usage
“In our national consumer research program, the percentage of consumers who use a branch at least once in a given month was 77% in 2020, while the percentage who use mobile banking at least once per month was 68%. Both trail monthly online banking use (88%). Expect the percentage of consumers using mobile banking at least once per month to surpass the percentage using a branch at least once per month in 2021. The reason for this is highlighted above in our discussion on branches. All generations were forced to become increasingly comfortable with financial services technology as a result of the pandemic, and this use will continue even as the pandemic fades.”
Analysis: A surprising miss
Monthly branch usage declined slightly in 2021 to 76%, and, in fact, mobile banking usage did not grow as much as we expected, from 68% to 71%, according to our national consumer research.
What this illustrates is two things. First, branch usage will continue to be a fundamental part of how consumers interact with their financial institutions into the foreseeable future. Second, the adoption of mobile (digital) banking will continue to be generationally driven and will continue to increase year over year at a steady pace.
What we said: Primary financial institution status of the “Big Three” will exceed 50%
“As we have noted many times in this venue, the major banks are growing their share of primary financial institution status at a very rapid pace. The “Big Three” of Bank of America, Chase and Wells Fargo today are named as primary by 45% of all consumer households in the U.S., and this stat is even larger for small businesses.
“Expect this to grow to 50% in 2021, driven by all generational groups but especially by the younger groups – the millennials and Gen Z. The challenge that community financial institutions face is the perception that their technology solutions cannot match up to those of the big banks coupled with the strong marketing presence caused by ubiquitous advertising and excellent branch presence in many markets.”
Analysis: On target
The primary share for the top three banks in 2021 was 49%, so our projection was slightly optimistic but essentially correct. Regardless, it is clear the impact the large banks are having on the consumer marketplace and the threat they represent to community-based organizations. This is especially true for younger consumers, who are opting for the large banks in record numbers.
It is also noteworthy that the big banks are growing their primary share for small businesses. Bank of America, Chase and Wells Fargo now control over 60% of small business primary relationships.
What we said: There will be heightened merger activity in 2021
“The interesting trend in regard to the number of banks and credit unions in the U.S. is the remarkably consistent decline year over year, regardless of the environment. In good times or bad, we tend to lose around 3% of the industry by count of institutions. This rate of compression did not accelerate during the Great Recession, nor did it slow down in the recent expansion.
“The only logical conclusion is that the M&A activity is being driven by factors other than the economic environment. We believe those factors are the increasing cost of remaining technologically relevant, and the aging of the current crop of industry COEs and the inability to find replacements. Neither of these factors is going away, and in fact they are probably growing. As a result, we anticipate more M&A activity in 2021. It will be important to have a board-supported M&A strategy in 2021.”
Analysis: On target
While the final data on mergers is not yet available, there was an acceleration in industry consolidation for both banks and credit unions in 2021. We expect this trend to continue.
All in all, we had a reasonably accurate set of predictions for 2021, with the misses primarily by degree and often explainable by diving deeper into the data.
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