Despite a significant uptick in consumer confidence and a number of other positive economic reports, several economists cautioned against "unrealistic optimism" about the current economy and where it is going in the next six months.
"We're a little cautious, although the numbers were more encouraging than expected," said Larry Halverson, SVP of MEMBERS Capital Advisors and president of MEMBERS Mutual Funds, both subsidiaries of CUNA Mutual Group.
"The numbers were more positive than what we expected to see, however, all these numbers are notoriously volatile," added Bill Hampel, CUNA's chief economist. "These numbers aren't enough to change our outlook on the year. Now, if we see similar gains in these numbers the next couple of months, that's a different story."
Consumer confidence, as measured by New York-based private research group The Conference Board, rose for the first time in six months in December with a score of 93.7, up about 10 points from November. But that's still well below the 100-plus range it had been at in 2000, noted Steve Rick, senior economist with CUNA.
"The numbers coming in for Christmas are weak, so I think what we're seeing is that with all the patriotic feelings out there right now, people are saying they are confident, but that's not being borne out at the cash register," Rick suggested. "It's a dichotomy of beliefs and action."
Calling the consumer confidence numbers "unrealistic optimism," Halverson pointed out that at the same time the consumer confidence numbers were posted, weekly jobless claims were up by 7,000 for the week of Dec. 22. "Unemployment claims are up, so reality for some of these folks is about to set in," he added.
Part of the problem with relying on consumer confidence to pull an economy out of recession is that at some point, the debt load consumers are piling on in order to continue spending gets too heavy, Halverson commented.
Short-Term Splurge
"There just isn't more room to leverage consumption," he said. "It's good to have a high level of confidence, but it's not smart to project into the future based on that. Some of the positive attitude consumers are expressing is people trying to keep the economy going and treat themselves well in a difficult time. After everything we have been through, people feel like they deserve a little splurge. But it's hard to imagine that continuing much more."
And some of the patriotic fervor that has bolstered consumer confidence may start taking a blow as the war in Afghanistan moves to a different phase.
"We had much better than expected war news, which really helped," Halverson observed. "But as this continues, and good news stops flowing and maybe even some bad news starts coming in, we're going to feel it."
Still, Rick noted CUNA is projecting that during the second quarter of the year the country will emerge from the recession. Hampel agreed, adding, "quite a few people have reached the conclusion that we have been in a recession now for a while, so in six months, things should be better."
Other numbers of note that came out over the holidays included the Commerce Department's reports showing new home sales were up 6.4% in December and auto sales up 4.5%. But again, economists told The Credit Union Journal those numbers may be followed by a slump beyond the typical seasonal contraction after the holidays.
Borrowing From The Future
"The problem with both these numbers is that we feel those are borrowed from the future in that people who maybe had planned on buying a home or a car later on went ahead and did it now instead," Halverson explained. "So we could see a really dramatic economic slow-down in those areas."
Rick agreed, saying the higher fourth quarter numbers could represent "a cannibalization of first quarter car sales and home sales."
Still, there is some good news in the offing for credit unions, Hampel noted, as these trends taper off. "Even though auto sales may well be weaker once all those special manufacturers' deals are over, credit union auto lending could actually be stronger as loans return to traditional lending institutions," he advised. "I expect the big swing in auto sales to slow down as those 0% financing deals come off."
No More Rate Cuts
Rick suggested that the other thing that brought lending rates down-the Federal Reserve's numerous rate cuts-is yet another trend that is likely to taper off now. "It looks like the Fed will be on a hold for a while," he counseled. "And besides, they're running out of room to keep cutting rates. The concern, of course, is that we could be buying short-term economic stimulus, and we'll pay for it with long-term inflation."
"The economy is still fairly fragile," Hampel observed. "It does not look like this recession will be as severe as that of 1980 to 1982, it may be closer to the one in the early 90s. We're still looking at a recessionary economy with weak spending and borrowing and strong in-flows. Fortunately, credit unions know how to operate in that environment."
