From an economic perspective, things are going pretty well – which means it’s time to prepare for things to get worse.
According to Steve Rick, director and chief economist with CUNA Mutual Group, the U.S. economy has been in an expansion for nine straight years, the second-longest such positive streak in history, but there signs a recession might be looming.
Speaking during the recent CUNA CFO Council conference in Austin, Texas, Rick said he foresees a “slight” recession in 2020, with negative 1 percent growth – significantly tamer than what struck the country in 2008-09.
“It is not going to be like the Great Recession; it will be an inventory-correction recession,” he explained.
As it stands today, the U.S. economy is in better shape than it has been in many decades, Rick noted. Inflation is calm at just 1.7 percent, unemployment is microscopic at 3.9 percent, the lowest level since the 1920s, and there are 6 million job openings, the highest such figure in American history. But what sounds like good news is a bit of a double-edged sword, he said.
“This is an incredibly tight labor market. CEOs cannot find enough viable candidates. But with all those jobs available, that eventually will push up wages and then inflation,” said Rick. “We are at a perfect place. I tell people things are fantastic, but we will overheat as wages and output rise.”
There are several factors that lead Rick and other economists to believe a recession will take place at some point in the near future. The federal government is expected to continue to run a deficit over the next several years, meaning the U.S. Treasury Department will have to continue to borrow money. Rick expects the Fed Funds rate to hit 3 percent by 2020, and the 10-year Treasury rate will hit 4 percent the same year. He said those higher rates will, in turn, affect mortgage rates, which will constrain the housing market.
Credit unions will be affected most directly by the increasing price of money, Rick said. Not only will interest rates be moving up, there will be a “mix effect” as members take money from regular savings to buy CDs as those rates rise. Historically, as the Fed Funds rate rises 1 percent, CUs tend to raise their CD rates 0.7 percent, he said.
Impact on CUs
In the past three years, credit union yield on assets has been the lowest in history, 3.5 percent. As the 10-year Treasury has fallen, other rates likewise have fallen. As the 10-year Treasury rises over the next four years, Rick said, CU yield on assets should rise – but how much will depend on the cost of funds.
CU loan-to-share ratios have been rising each year since 2012-13. Rick expects another rise from 2017 to 2018.
“The loan-to-share rate is the highest since May 1980. Credit unions have seen tight liquidity for years,” he commented.
In the macro economy, Rick said auto sales should remain above 16 million units annually, but slowing slightly from the torrid sales pace of 2015-17. Home sales will accelerate to 5.5 million in 2018, but inventory will remain tight because many people have low-rate mortgages and do not want to move. Stock prices are the highest ever, but in terms of price-to-earnings ratio prices were higher in 2000.
“This is double the long-term rate, and history shows things revert to the long-term average,” he warned.
Average American income is rising 3 percent, while housing prices are rising 6 percent, which Rick said is unsustainable, but not as bad as the 11 percent rise in 2005-06. He said home prices rising today due to insufficient supply, whereas in 2005-06 it was excessive demand due to speculative buying.
The national savings rate continues to fall, which historically has been a harbinger of recession. Rick said people are spending more today because consumer confidence is as high as it was in December 2000 – 18 years ago.
“Consumer confidence has jumped in the last 18 months, what many people are calling the ‘Trump Bump.’”
In the last 4 years, CU loan growth has been 10 percent each year, a “boom.” Rick is forecasting 9 percent loan growth in 2018, followed by 8 percent in 2019 and 5 percent in 2020.
“Size does matter: the bigger the credit union, the better the loan growth,” he assessed, adding a similar effect is seen in membership growth and ROA.
“People ask me all the time: ‘When is the next recession?’ Credit union data is the best factor to predict a recession,” he said. “Look at the growth rate gap of loan growth less deposit growth. People borrow future income for current consumption. I believe by 2020 the gap will hit zero, and every time that happens we have a recession as people start saving and stop spending.”