Yet another economist is warning credit unions to prepare for a recession in as little as 18 months.
Speaking during the recent CU Direct DRIVE conference near Dallas, Dr. Elliott Eisenberg, Ph. D., economist and president of GraphsandLaughs, Inc., told credit union attendees the U.S. economy is likely to be very good for roughly the next year and a half, after which things will likely get more difficult. So credit unions need to think about how to position themselves for the recession that probably will come in 2020 or 2021.
“I am not saying we are coming to the end of the world, but we are in the second-longest recovery of all U.S. recoveries and by the time there is another recession it will break the record,” he said.
Eisenberg’s commentary echoes similar remarks from CUNA Mutual Group Chief Economist Steve Rick, who also predicted a recession during a speech at the CUNA CFO Council conference last month.
Certainly there is plenty of good or even great economic news, Eisenberg opined, noting unemployment is at a 50-year low, there is no housing bubble of any kind, nearly everyone who should be getting credit is getting credit and those who shouldn’t get it are not. Additionally, default rates continue to decline across most types of loans, with the exception of auto loans and credit cards.
“Don’t get lured into thinking every car loan you issue will continue to get paid,” he urged the audience. “Do not let up on your lending standards. You want to increase your loans, but don’t let up on FICO score requirements. We are late in a business cycle. Loans that look good now will not look good in a recession. Stay away from subprime. There is a glut of used cars available, driving down used car prices. There are so many cars because so many loans were made for so long, and so many cars are coming off 3-year leases.”
Why does Eisenberg feel such a need to keep hammering the message of preparation, like the fable of the Ant and the Grasshopper? Because there is so much good economic news going on today, he is worried people will blissfully sail over the edge.
Overall household delinquency rates are still low, but no longer are falling because deleveraging is “done,” Eisenberg said. All three major consumer confidence surveys show people are “happy.” Professional and manufacturing indexes likewise are showing positive sentiment, and businesses are investing in M&A and equipment. Even hotel occupancy rates and RV sales are up.
“What’s wrong? There’s nothing wrong. Everything is coming up roses, but it will end eventually,” he said, adding, “I cannot tell you enough: don’t be deceived. Enjoy the times now, but be ready for when things start to change.”
The recent tax cuts are going to “supercharge” the U.S. economy, but only in the short run, he explained. The global economy is doing “okay.” After a couple good years, Europe and Japan have slowed, and a couple South American countries are on the edge of a recession.
In America, GDP is not going to continue to grow fast due to weak population growth and low labor productivity increases. Labor markets are “so tight it is crazy,” he said.
“In fact, we are running out of workers. Due to lower population growth, there are fewer new people entering the labor force each year. Initial claims for unemployment have been below 300,000 for 165 straight weeks. The economy is at or near full employment. In 2010 there were seven unemployed Americans for every job. Now the ratio is one-to-one. But low unemployment does not lead to wage growth, especially when worker productivity is low.”
Inflation finally has started to appear in the U.S., which is causing the Fed to raise short-term interest rates. According to Eisenberg, the “problem” with central bankers is “they love to raise rates.” He noted the Fed Funds currently is at 1.625 percent. There are two more rate hikes expected by the end of 2018, then perhaps two or three more in 2019. He estimated the effective rate will be approximately 2.875 percent by the end of 2019.
The real estate market is a “mess.” Eisenberg said it is “beautiful” on one hand, but “a wreck” on the other. He said builders have stopped building small houses because they make less money on those, so there are fewer and fewer entry-level homes in any market in the country. Other factors: restrictive building codes and land use restrictions are limiting construction, as is a shortage of skilled tradesmen – who quit after losing their jobs in 2007-08. There is a trend of 35 straight months of decreasing inventory. Home prices have risen three-and-a-half years in a row.
“Don’t let down your lending standards, treat your employees well and you will be ready,” he said. “Make sure your loans are solid. Reduce the terms and increase the FICO scores. It will be a small recession, not like the last recession, but it might take a few more months to get through because there will be a large federal deficit, meaning less room for stimulus from the federal government.”