Without fail, everywhere I go with every group I speak to lately, the number one question is: “When will the recession start?”
I get it.
The current U.S economic expansion is quickly approaching its record-breaking 10th year. The good times can’t last much longer – right? Maybe they can.
Certainly, a number of significant headwinds are more obvious now. Investors seem to be more worried, which is reflected in increasing financial market volatility.
While obsessing over those developments, it’s helpful to recall the words of MIT economist Rudi Dornbusch: “Economic expansions don’t die of old age — they’re murdered by the Federal Reserve.”
The current Federal Reserve, however, doesn’t seem to be especially bloodthirsty to me. With only modest inflation pressures, low energy prices and lots of weakness globally, I expect Fed policymakers to remain very cautious going forward – increasing their benchmark federal funds rate only twice over the next year.
Rather than killing the recovery, I believe Fed restraint should lead to decent overall economic growth going forward, continued labor market health and solid household earnings gains. Consumer balance sheets are (and should remain) in good shape, with debt-to-income ratios near 25-year lows.
Don’t forget consumers represent 70 percent of U.S. economic activity, which I think we can all agree, is good news for credit union operations.
In 2018 alone, credit unions delivered $12 billion in direct financial benefits to their member owners in the form of lower interest rates on loans, higher yields on savings accounts and fewer and lower fees compared to those at the nation’s commercial banks. All of this led to fast membership growth.
Looking forward, I expect a continuation of strong membership growth and healthy (though slower) loan portfolio growth. Loan quality isn’t likely to deteriorate significantly, and earnings should remain strong overall.
Still, from an operational perspective a few things of concern stand out, and credit unions should take notice and plan accordingly.
First, there is a real danger of more obvious interest margin pressures going forward. The combination of rising interest rates and tight liquidity could be troublesome.
Today, 20 percent of credit unions that hold half of credit union assets report loan-to-share ratios of 90 or higher. Money market mutual fund yields, which were close to zero percent for several years, have now eclipsed 2 percent and will undoubtedly follow market interest rates even higher – and in lock-step fashion.
All of which means that credit unions trying to grow deposits going forward will almost certainly have to pay more to attract those funds.
Second, there will likely be more obvious pressure on noninterest margins. Higher market interest rates are giving consumers pause when shopping for mortgage financing and pushing many into lower-rate adjustable financing. The resulting decline in longer-term, fixed-rate mortgage originations will likely mean substantially lower gains on sales as credit unions sell fewer fixed-rate paper into the secondary market.
Additionally, credit union turnover has been steadily increasing over the past several years with average turnover rates on the front line hovering around 20 percent. As a result, talent management and related costs will likely be another more obvious issue in the coming months, especially with unemployment at historic lows and the supply of job openings exceeding demand among the labor pool.
In all, I don’t see a recession in sight over the next 18 months, but more obvious operational challenges are looming. Continuing to grow fast and deliver big benefits will be a bit more difficult in the months ahead. Credit unions should be prepared to meet these challenges head on.
