Predicting the next recession, or at least the next economic downturn, has become a spectator sport in some financial services circles. But what do credit union insiders and experts predict will happen in the U.S. economy this year?
Credit Union Journal spoke to some of the leading economic experts in the community to find out. To be sure, many economic indicators are either positive or moving in that direction right now. To wit:
- Applications for unemployment benefits in the U.S. fell in late May for the second week in a row, the latest evidence that hiring is likely solid. In fact, weekly applications for unemployment benefits dropped 10,000 to a seasonally adjusted 268,000, the Labor Department reported last week.
- These figures, along with other recent data, suggest the economy is picking up a bit after barely expanding in the first three months of the year. Applications are generally considered a proxy for layoffs, so the recent decline is a sign that companies are confident enough to hold onto their employees.
- The U.S. economy expanded at just a 0.5% annual rate in the first quarter, after tepid growth of 1.4% in the final three months of last year. In the past few weeks, however, several reports have suggested growth will rebound in the April to June quarter to almost 2.5%.
- Sales at retail stores and restaurants jumped in April, evidence that Americans were willing to spend more after several months of caution. And the housing market has really perked up: Sales of existing homes rose last month, while sales of new homes soared to the highest level since 2008.
- Consumer confidence has increased to 95.8% according to the University of Michigan's May report — the highest level in eleven months.
Indeed, some economists suggest that the improving economy, if sustained, could encourage the Federal Reserve to raise the short-term interest rate it controls for only the second time in nine years, perhaps as early as its next meeting in June or the following one in July.
But not all industry insiders are feeling confident about the economy.
For example, Mike Moebs, founder of Moebs Services, said the U.S. is still riding out the last recession, "There is pretty solid evidence that the recession that started in late 2007 has not ended," he said.
Citing "unused" Federal Reserve transaction account metrics that he has analyzed, Moebs said: "Consumers are not using their cash and if they are, it is very, very stingily."
And Dan Geller, behavioral economist at Analyticom, a financial research firm in the San Francisco Bay area, said: "the possibility of recession is greater than it was four to five months ago. "All it will take for the U.S. economy to go into recession is if consumer spending reduces by 5% collectively."
A recession is generally defined as a significant decline in activity across the economy, lasting longer than a few months. The technical indicator of a recession is two consecutive quarters of negative economic growth measured by the nation's gross domestic product.
Curt Long, chief economist at the National Association of Federal Credit Unions, pointed out that recessions are a regular and expected part of part the long-term economic cycle. "[Recessions] are difficult to predict," Long said, noting that historically recessions typically occur once every seven to 10 years.
Long added he predicts the chances of a recession in the next year are on the low side — or between 10% to 15%.
Steven Rick, chief-economist at CUNA Mutual Group, was more specific.
"No recession is expected for the next two years," Rick said in an email. "Economic activity is expected to rise 2.5% in 2016 and 2.8% in 2017. The economy will begin slowing down in 2018 as the credit cycle moves from expansion to contraction."
Credit Union Executive Society CEO John Pembroke also does not think the U.S. economy is on the verge of a recession. "People might be thinking about it because the economy experiences some sort of recession every seven to eight years," Pembroke said. "The last time we came out of a recession the growth was much more significant."
According to Credit Union National Association data, CU savings balances have grown steadily since 2009, increasing by more than $300 billion in that time period. "Credit union savings balances are on track to grow by 5% in 2016 and 4% in 2017," according to CUNA's U.S. Credit Union Profile report.
That leads Moebs to suggest that the American consumer "is not back."
"We've only seen two quarters where checking account balances have not increased," says Moebs, citing Federal Reserve data from Q1 2008 to Q4 2015. "[We] have never seen the consumer hold so much money in their checking accounts." According to Moebs, CUs currently hold $1.8 trillion in transaction accounts, the highest it has ever been."
WHAT CUs CAN DO
Industry insiders and experts advise credit unions to create strategic business models that generate the most during economic growth periods, while lessening the blow of economic downturns.
Bill Myers, Director of NCUA's Office of Small Credit Union Initiatives, notes most CUS have sufficient ability and experience in handling recessions. "Credit Unions are expected to survive a full business cycle — what is unexpected is the pacing of the cycle," Myers said.
"Build a sophisticated portfolio, hedge it against how interest rates move," Myers offered, "you do not want to be caught with overnight funds as interest rates start to fall."
Moebs has similar advice: "Credit unions should be concerned less about a recession and more about a situation where [they] have to think of complete asset side diversification." He suggested that CUs look to small-business lending. "Unfortunately, they have looked to commercial real estate for business loans and are going up against banks," he noted.
CUs should also look to the operations side of small businesses and put less focus on business real estate and consider small unsecured loans for small business to provide liquidity and short-term cash, according to Moebs, "[More than] 70% of jobs come from companies with 50 employees or less — mainly 25 employees or less," he noted.
Credit Union Executive Society's Pembroke advocates a "scenario pointing" strategy that identifies a select group of scenarios that have a decent probability of occurring. He suggested CUs watch for scenarios such as potential mergers, major competitive activity, recessions, regulatory changes and executive departures, among other things.
"There are hundreds of scenarios that could affect a CU," Pembroke said. "Every credit union needs to identify which ones have the highest probability of taking place." Once identified, CUs should look to what implications these scenarios will have and how they can prepare for it.
