Recovery Is Underway, But No Smooth SailIing For Economy Yet
WASHINGTON-The economy may be on the mend, but CU economic analysts are cautioning not expect to see above-trend growth any time soon.
"I see a very sluggish economic growth period. I see job creation as being very tepid," said NAFCU's Chief Economist, Tun Wai. "The likelihood of a double dip is very slim but there is still that possibility."
The most recent survey of the Credit Union Economics Group shows that few economists in the CU industry expect a robust recovery, with GDP projected to grow at just under 2.3% for the year and unemployment declining only slightly. Southwest Corporate FCU EVP/Chief Investment Officer Bruce Fox said that the recovery is underway but will continue to be "weak compared to historical standards."
Wai expects to see a very modest improvement in the labor market, with unemployment dropping from 9.7% today to 9.5% at year's end. "One of the reasons I'm pretty sure about that number is because businesses tend to delay hiring unless there is sufficient demand on their products and people won't buy if they are very uncertain about the future," he explained.
CUNA Mutual economist Dave Colby also sees consumers remaining "extremely cautious" even as business investment and capital expenditures have boosted leading economic indicators and Wall Street continues to rally. Though every Fed district but St. Louis saw increasing economic activity in the most recent survey, the ripple effect of the recession on state and local government budgets could deal additional shocks to the consumer's psyche.
"When you see a teacher getting laid off, which most people assume are permanent jobs and immune to cycles, and when you see a 20-year government employee lose his job, you start to think, 'If you're not safe in government maybe I as a consumer need to keep my powder dry," Colby said.
Production recovery, inventory re-building and federal stimulus will power the recovery through the first half of this year, CUNA economist Bill Hampel noted, but consumer spending is likely to trail business expenditures-a trend reversal from the consumer-led recovery of the early 2000s' recession.
"That doesn't mean consumer spending isn't going to grow, it's just not going to grow that vigorously," he explained.
Georgia Central CU SVP/Chief Investment Officer Cory Johnston is painting a bit more of a sunny picture than some of his colleagues.
"If you look at temporary employment, it's been trending positive for the last six months. That does bode well for jobs creation as does corporate profits," he said. "I think [consumers'] balance sheets have been improving. They have obviously been shedding debt and now that the stock market has found a bottom and bounced off it and home prices are leveling off." Johnston sees the "wealth effect" starting to switch from negative to positive over the year, especially as job creation starts to make headlines.
Still, with more that eight-million jobs lost since the beginning of 2008, even with a job creation rate of 200,000 per month it would take more than three years to return to trend, Hampel pointed out.
The Federal Reserve is widely expected to keep rates as low as possible at least until the end of the year, but government spending could start to create an inflation problem in early 2011 and force the Fed to make commensurate rate hikes. The overnight trade is already improving, Johnston pointed out, as spreads have moved from 11 basis points in Feb. to 20 basis points in April. Government mortgage-backed securities are also showing improvement, and Johnston expects money to move out from Treasuries as risk appetite increases, which will also put upward pressure on interest rates.
A steepening yield curve could give CUs a chance to pick up a little more income with agency paper and other conservative investments, but CUs will still be "sitting on a lot of cash" in 2010 as Fox expects shares to grow by 8% while loans lag behind at 3% growth.
Despite the sluggish pace he's predicting, NAFCU's Wai did encourage credit unions to start planning for the recovery and the new challenges it will bring. Though CUs are awash in deposits now that will likely change quickly as consumer confidence in the economy and other investment options starts to improve.
"At some point your members will jump ship; the flight to safety won't be there anymore, so the funding source you've been heavily dependent on is going to walk away because there are other options," Wai explained, noting that CUs will have to respond with deposit rate adjustments to keep liquidity strong. "As the economy turns around and picks up a head of steam, you're going to have loan demand come through the door."