WASHINGTON — While the stock market continues to rise, the credit union industry's leading economists downwardly revised their forecast for the second quarter, saying that their assessment at the end of the first quarter was too optimistic.
The Credit Union Economics Group, which announced its forecast at the NAFCU Annual Conference, is looking for a deeper contraction throughout the rest of this year, and a very tepid recovery in 2010.
National unemployment, currently around 9.5%, is expected to rise into double digits later in the year and will remain that way for a big chunk of 2010, the CUEG outlook reported. The mean forecast in the first quarter looked for unemployment to remain around 9.3% at year's end; that number was upwardly revised to 10% with the possibility of the rate hitting 10.6% before the year is up in the latest report. The jobs market will only slowly improve, as the mean forecast for unemployment at the end of 2010 is 9.7% - well above trend levels. That increased unemployment will put a big damper on consumer demand for goods and loan products despite low interest rates.
"It takes awhile for the businesses to feel comfortable to hire staff again," NAFCU chief economist Tun Wait told Credit Union Journal. "You have to have a rather extended period of growth in order for businesses to go out and hire people."
While the group forecasts -2.2% growth for all of 2009, the news is not all bad as it sees real economic growth starting by the second half of the year. Unlike previous recessions, however, there will be no "V" shaped recovery as 2010 should be the start of a long and slow recovery process.
"It's going to be a rather flat or slow positive growth. We're talking about a long-term kind of recovery, so don't expect your borrowers ability to repay to improve any time soon... be careful of your delinquencies," Wai said.
Inflation may be tame for now, but the increased government borrowing and spending on the stimulus and other programs could precipitate a sharp rise in interest rates as the Fed looks for ways to keep the public deficit under control.
"Though our forecasts for inflation and interest rates are fairly benign, we do have concerns about rate spikes due to the crowding-out effect of global fiscal stimulus with borrowed money," CUNA Mutual Group chief economist Dave Colby said. "Interest rate spikes would trigger rapid declines in consumer spending and sharply increase the risk of a double-dip recession."
As the American economy is likely to see ups and downs over the next few years as it muddles along in a protracted recovery, it is important for credit unions to exercise flexibility on their balance sheets, noted NCUA Office of Examination and Insurance deputy director John Kutchey - especially when one considers potential economic and financial policy changes.
"It is unclear what impact those adjustments will have on interest rates and economic performance, so given the uncertainty this presents, flexible balance sheets are an important part of each credit union's strategic planning," Kutchey said.
