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Raddon Predictions for 2021

January 14, 2021
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It’s good to have 2020 in the rearview mirror.

Raddon will provide more detailed predictions for 2021 in an upcoming Raddon Report, but suffice it to say we don’t work from a crystal ball. For 2020, we did not predict a pandemic, a 31 percent decline in GDP in second quarter and a 33 percent growth figure for GDP in the third quarter. Yes, it’s fair to say we’re all glad to have 2020 behind us.

Yet it’s also fair to say that COVID-19 has not been so much a disruptor as an accelerant. While some new trends are emerging, many existing trends are moving forward at a much faster pace. For example, think of video tools such as Zoom or Microsoft Teams. These are not new technologies, but their relevance has been heightened dramatically by the pandemic. One trend is that business travel will likely grow at a slower pace than in the past, even when we do feel safe to travel. Hotels and airlines may feel a permanent impact.

In the past, we all enjoyed the occasional visit to the movie theater. When we feel safe, we will go back to the theater, but probably not nearly as frequently as pre-pandemic. Streaming services and at-home movie releases may relegate the ubiquitous movie theatre experience to the same fate as that of game arcades in the 1990s. Streaming is not a new phenomenon, but its use has clearly accelerated.

2021 is likely to be a time of change as we emerge from the pandemic and these accelerated trends take further hold. Environments typified by significant change are notoriously difficult to forecast, but we will take a look at the tea leaves to project how we think 2021 will unfold. We will look at two areas: the economy and the financial services industry.

The Economic Outlook

Predicting the direction of the economy is difficult enough emerging from a pandemic, but couple this with a change in administration, and things become even more problematic. Possible changes to the tax code, energy strategy or other policy changes could play a significant role in how strong 2021 is economically.

In general, we are optimistic about 2021 for several reasons. First, demographics generally are favorable for the United States. Millennials, age 21 to 41, number almost 95 million people in the U.S., or 29 percent of our total population. Gen Z, age 20 or younger, constitute another 86 million, or 26 percent of our population. In fact, the U.S. is the only major industrialized nation with a reasonably young demographic profile. This matters greatly in that younger individuals drive economic growth through their purchase activity. Older individuals tend to be savers by contrast.

The other important factor to consider is debt levels. As we emerge from the pandemic, a factor that will aid in our recovery is the relatively low levels of debt carried by the average household in the U.S. The debt-to-disposable income ratio today is 88 percent; in early 2008 as we entered the Great Recession, this ratio was 130 percent. High levels of debt carried by individuals and households tend to prolong recessions, as consumers shed this excessive debt slowly.  

Prediction: GDP will grow between 3.5 percent and 4 percent 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 up. 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, the number of small businesses in the U.S. declined by 29 percent. The resiliency of small businesses will be tested in 2021.

Prediction: Unemployment will be between 4.5 percent and 5 percent by year end 2021.

Unemployment is slightly under 7 percent now; to get to 5 percent 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.

Prediction: Home sales will be between 7.5 million and 8 million units.

Home sales activity is being fueled by three factors. First is the millennial generation; second, low interest rates; third is 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.

This level of home sales would compare with that seen each year from 2004 to 2006, and could lead one to believe we are heading back to the mortgage debt crisis which 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 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 the economy.

Prediction: Auto sales will be between 16.5 million 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-pandemic levels. Low interest rates will boost auto sales throughout all of 2021.

The Industry Outlook

The primary challenge the financial services industry faces in 2021 is an extended low interest rate environment. This industry generally does not function well in a low rate environment given its use of low-cost core deposit funding. Core funds are worth much less in a low rate environment, and, therefore, spread compression will be more severe. While we expect some increased level of charge-off activity in 2021 as loan forbearance programs expire, the impact will not be nearly as large as seen in the Great Recession simply due to consumer mortgages being largely immune – a very different scenario than the Great Recession.

Prediction: 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. In the midst of 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 of financial institutions intended to open new branches in 2021 rather than 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.

Prediction: 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 percent in 2020, while the percentage who use mobile banking at least once per month was 68 percent. Both trail monthly online banking use (88 percent). 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: 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.

Prediction: Primary financial institution status of the “Big Three” will exceed 50 percent.

As we have noted many times on this blog, 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 percent of all consumer households in the U.S., and this stat is even larger for small businesses. Expect this to grow to over 50 percent 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 those of the big banks, coupled with the strong marketing presence thanks to widespread advertising and excellent branch presence in many markets.

Prediction: 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 percent 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 merger and acquisition 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 CEOs and the inability to find replacements. Neither of these factors is going away, and in fact 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 this year.

These are our predictions for 2021 – once again with no crystal ball to aid us. Let’s see how we do!