Mike Schenk speaking at the CUNA Lending Council Coference.
The economy is heading in the right direction. It's just taking the scenic route.
That’s the gist of what Mike Schenk, vice president of CUNA’s economics and statistics department, told the CUNA Lending Council Conference in Miami. He says credit union lenders have reasons for optimism in the coming year despite some lingering obstacles. It will just take longer than normal to recover.
“The consumer sector is about done deleveraging, but the government likely will make big spending cuts and raise taxes,” Schenk says. “So the economy will continue to limp along.”
Schenk offered these insights into the economy:
►We haven’t reached our key goals yet. The nation’s top goals are to grow the economy and add jobs. Although there has been improvement—the economy grew 1.8% last year and 2% through the third quarter of 2012—the long-term average for economic growth is 3.25%.
►Persistent and obvious economic weaknesses remain. “Whenever you have an asset bubble burst that was grown by debt accumulation, the recovery really lags,” Schenk says.
►We’re in a sustainable recovery. The economy is in better shape today than it was last year at this time, Schenk says. During the past year:
►The auto industry is rebounding. New-auto sales are on the upswing, fueled by pent-up demand. The average age of a car in the U.S. is 10.5 years—an all-time high. “That’s a good harbinger for lending,” Schenk says.
He predicts new auto sales will total 14.2 million in 2012, up from 12.7 million in 2011.
►The housing sector is much improved. Sales of new and existing homes are up, as are average prices. This will help grow purchase money mortgage volume.
►Household debt is declining due to significant consumer deleveraging. Household debt as a percentage of disposable income reached 120% a few years ago, and has fallen to 103% today.
There are, however, two potential threats on the horizon: The Eurozone crisis and the fiscal cliff.
The U.S. economy would take a $600 billion hit if Congress doesn’t act to reduce the deficit. That would certainly put us in recession, Schenk says.
And if the Eurozone collapses, Europe will fall into a recession, which will reduce U.S. exports to that region. That in itself wouldn’t be enough to plunge the U.S. into recession, Schenk says. But other residual effects combined could be damaging, such as a disturbance to the supply chain and a mounting debt load among fragile European banks.
In 2013, Schenk predicts, there will be:
►Fast membership growth. “People increasingly understand the credit union difference, and are voting with their feet,” Schenk says.
►"Painfully slow" loan growth. Schenk predicts 4% loan growth for 2012 and 5% for 2013. In previous recoveries at this point (40 months into recovery), loan growth ranged from 10% to 11%.
►High earnings despite interest margin compression. This is due largely to increases in noninterest income.
►Big differences between large and small credit unions.
The financial performance for large credit unions is, by and large, back to normal. Not so much for small credit unions, Schenk says, and there’s little to suggest this will change.