PASADENA, Calif. -
Dwight Johnston, WesCorp's VP-economic and market research, and David Colby, CUNA Mutual Group's chief economist, said falling home prices are just the tip of the iceberg. They predict job losses in residential construction and problems in the sub-prime lending market will spill over into the larger economy.
What's worse, the two said, the Federal Reserve cannot lower rates as it did earlier in the decade because inflation remains above the Fed's preferred 2% annual rate, and cutting rates could hurt the U.S. dollar internationally.
Johnston and Colby dismissed the recent rise of the U.S. stock markets as "buyouts obscuring fundamentals." They said the skyrocketing equity values are built on credit, and added the market's rise sends a confusing signal to the Fed.
According to Johnston, Wall Street is expecting inflation to cool, interest rates to remain stable, and the rise of stock values to blunt the impact of the housing slowdown. In sharp contrast, he and Colby foresee the housing market contracting further, resulting in a stalled economy. They see inflation abating slowly, leading to a "growing chance" of a recession.
"First quarter GDP was surprisingly weak at 1.3%, and probably will be revised downward under 1%," Johnston said. "The unemployment rate is misleading: manufacturing jobs are falling and even retail is losing workers."
Added Colby: "Jobs are down, and the quality of jobs is down. The negative savings rate means people will have to pull back from consumption, which will impact what we do best-loans."
The problems in housing-especially the sub-prime lending sector-are serious, the two continued. Johnston said home builders are reporting loan problems, and many consumers are scrambling to refinance mortgages with escalating payments. He said lenders and security investors are the ones who are "at risk" if the deterioration of the sub-prime market leads to a housing contraction and, eventually, a recession.
Colby and Johnston presented their forecast at the recent WesCorp Future Forum conference here. After several minutes of delineating gloomy scenarios to the audience, Colby quipped: "Now that we're all upbeat, what does it mean to credit unions?"
CU savings and asset growth, as well as vehicle loan growth, should rise modestly in 2007 and 2008, Colby said. He attributed the recent decline in savings to the robust stock market.
"Consumers aren't stupid," he said. "They look at the rise of the equity markets and follow. The S&P is up 7.6% year to date. If the market goes down, people go to credit unions with cash."
The money currently flowing into credit unions is in CDs, Colby noted.
In the months and years ahead, Colby predicted competition from sources ranging from national banks, to online banks such as ING Direct, to Home Depot and other retailers, will lead to an evolution in the financial industry.
"Home Depot scares me," he declared. "People will walk into Home Depot to do a home improvement project and will walk out with a home equity loan. Credit unions need to know the next generation expects to get financing wherever they buy a product."
The good news, Colby continued, is "credit unions do better in rough times. Don't count on economic growth; count on a lot of economic challenges. Credit unions historically have helped people, and we must remain relevant to those who brought us to the dance-baby boomers. We have to give boomers trustworthy investment advice for their retirement."
Finally, Colby added: "Economists don't give many guarantees, but I guarantee business as usual will not succeed."
