One economist at the Credit Union National Association is rejecting a theory put forth by former Federal Reserve Chairman Alan Greenspan that the U.S. bond market is in a bubble that may burst due to a forecasted rise in inflation as a result of increased spending as the U.S. nears full employment.

According to latest CUNA economic update, while the economy is reaching full employment, incomes are not rising quickly, and economist Mike Schenk suggested incomes in the retail sector are being capped and many Americans are living paycheck to paycheck.

Mike Schenk, CUNA
Mike Schenk, deputy chief advocacy officer for policy analysis and chief economist, CUNA

“Consumer spending accounts for 70 percent of U.S. economic activity and it’s been expanding but at a sustainable pace with no signs of overheating,” added Schenk. Market watchers like Greenspan have been “mis-forecasting” both inflation and bond yields for nearly a decade, Schenk said.

“Everybody has consistently forecast that this recovery will look like post-World War II recoveries with a consumer sector that is very engaged and spending at high rates and fueling inflation pressures and that’s simply not happening,” Schenk said in an interview with the Credit Union Journal. “One of the big ones is the fact that we’re in the middle of a really significant shift of demographics. Like 10,000 baby boomers a day retiring. Retired people don’t spend as much as working people do, dragging purchases down and price increases down.”

Even more, live births and first time home buyers are declining.

“All of this suggests that even if there is a bubble…we think it probable that the bubble Greenspan describes will fizzle rather than burst,” Schenk said. “The sky isn’t falling and we’re unlikely to be reporting on that anytime soon.”

Growth metrics, insurance and more
Low unemployment, modest home value increases and all-time high equity markets have buoyed both credit union loan and membership growth, Schenk added. Credit unions reported a half million membership increase in June, the highest increase in nearly two years and the largest June increase since 2003. Memberships are on pace for an annual increase of more than 4.5 percent, beating CUNA’s 2017 forecast of 4 percent. Mid-year loan growth stands at 4.9 percent – the highest first-half increase since 2005 – driven by auto financing, and CUNA expects that figure to top out at 14 percent by year-end, since second-half growth is usually equal to or greater than growth during the first quarter, because Americans buy more cars between June and August than any other period.

With strong economic growth and loan growth, delinquency rates ticked down for the second straight month and are now just below 0.7 percent on average.

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