MADISON, Wis.-There remains more concern than celebration among CU economists following last week's passing of a bill that backs the United States away from the so-called fiscal cliff.
Some analysts are projecting potential declines in credit quality, especially among members who are right on the fringe. But others believe the bill removes a lot of economic uncertainty and will actually lead to increased lending. And several have reminded noted while one "cliff" has been averted, there are still others to come as the battles over taxes and spending continue in Washington over the next few weeks as the new Congress settles in.
With much media fanfare, last week Congress voted to avert widespread tax increases and deep spending cuts that were to automatically take place on Jan. 1, making permanent the Bush tax cuts for individuals earning less than $400,000 per year and couples earning less than $450,000. The bill, however, raises rates on those who make more than that to 39.6% from 35%, while extending unemployment benefits for some recipients.
But Dave Colby, CUNA Mutual Group senior economist, says consumers reading those headlines may miss a smaller detail that has a big impact on wage earners. "A large share of wage-earning consumers are going to be very surprised by the 2% drop in their disposable income, since the temporary payroll tax cut was not extended."
Colby said individuals making $50,000 per year will lose $1,000 annually, or $83 per month. "This is real money, especially for those households living paycheck to paycheck. We didn't fully go over the fiscal cliff, but it sure feels like we are hanging over the edge. Expect more bad news for households to come in round two of this partisan bickering that should take place between now and the end of the first quarter."
A Pullback on Spending?
Consumers' first reaction will be to pull back on spending, which will translate into slower economic growth, deferring the recovery, said Colby.
"A bigger downside risk is deferred hiring or outright job losses due to lower levels of consumer demand. To really evaluate the impact we need to look at those living on the margin," Colby said. "While I don't anticipate a surge in delinquencies, defaults and bankruptcies, I believe recent credit quality improvements at credit unions will be stalled."
Colby urged CUs to help members absorb some of the lost net income by re-writing loans with better terms. "Credit unions with aggressive loan recapture programs can provide the most benefit to their members and protect net spreads."
'Repercussions' To Be Felt
Michael Moebs, economist and CEO at Moebs $ervices, Lake Bluff, Ill., sees similar trouble from the payroll tax cut not being extended. "The repercussion is there will be less to spend by the average worker, which will lessen any growth rates, such as in GDP-the economy will get more sluggish," said Moebs. "There will be pressure put on credit union management to increase salary and wages to offset the tax increase, which will increase expenses at a time of more lethargic growth."
More strain to the expense side of the ledger is coming from the extension of unemployment benefits for an additional year through 2013, said Moebs. "That will increase employer payroll tax for the average credit union."
Moebs shared strong concerns about the lack of significant spending cuts he predicts could eventually prompt credit reporting agencies to downgrade U.S. credit worthiness, which would raise the rate of U.S. Treasuries as well as the borrowing rate for FIs, all factors that could hike consumer loan rates. "Bottom line, credit unions and banks will be forced to reduce staff to offset the rise of expenses related to payroll taxes and a loss of credit worthiness."
Brian Turner, director and chief strategist at Catalyst Strategic Solutions, Plano, Texas, described lat week's legislation as being "somewhat mute" in advancing economic recovery, not sparking loan or share growth in the near future.
"It does little to provide stimulus to the economy, especially when 77% of U.S. households will see lower paychecks this year," said Turner. "Unemployment is not expected to reach 7% until the end of 2014. This does not portend to significant job growth or higher consumer spending nor does it remove the markets' sense of uncertainty. In fact, it creates even greater drama in February when the question regarding raising the debt ceiling comes into place."
CUNA Senior Economist Steve Rick, however, is more optimistic. "The fiscal cliff agreement will have a net positive effect on the average American citizen and therefore the average credit union member, and in turn the average credit union."
Rick said the permanent extension of the Bush era tax cuts for 99% of Americans eliminates the future tax uncertainty that engulfed households and small businesses during the recent past. "The certainty will boost household and business confidence, thereby encouraging additional consumption and investment spending. This faster pace of spending could push economic growth over 2.5% in 2013 with the creation of over two million jobs."
Moreover, Rick pointed out the signing of the fiscal resolution immediately led to surging stock prices. "This rise in asset prices and therefore household wealth could in turn produce a 'wealth effect' whereby consumers decrease their savings rate and increase borrowing and spending levels."
Rick added that credit unions could expect faster loan growth this year (5%) now that households have more certainty regarding their tax bill and less worries regarding the security of their job. Yet, higher payroll taxes will somewhat offset the positive effects of the bill, he concluded, leading many to lower their savings rate rather than drop spending levels."
In Saugatuck, Mich., Robert Genetski, president of ClassicalPrinciples.com and former chief economist at Harris Bank, said the fiscal cliff agreement represents a positive policy development as well as allays fears over further tax increases. Yet in spite of the latest agreement, individuals and businesses will have to adapt to higher tax and regulatory burdens in the period ahead.
"Millions of individuals will discover how promises to 'tax the rich' somehow increased their own taxes," offered Genetski. "The rich will adjust their finances to avoid higher rates. Businesses will shift the cost of new regulatory burdens to their customers and employees. These adjustments will reduce productive activity and lower living standards. However, the economic damage would have been greater if there had not been an agreement."
Better Than The Alternative
NCUA's chief economist, John Worth, sees the latest bill as a mixed bag.
"The deal is obviously far better than the alternative of a full fiscal cliff tightening," said Worth. "We'll avoid most of the tax increases and at least delay spending cuts. However, it does represent fiscal tightening and will result in slower growth relative to policies that kept tax and spending unchanged. That's troubling in an economy with high unemployment, sluggish job growth, and a weak housing sector that's just starting to recover. So the big question is whether we'll see enough momentum in the consumer sector to stomach the payroll tax increase and still keep the economy growing."