A Pause or a Reversal?

The economy takes two steps forward and one step back.

July 1, 2012

The economy has lost some of last winter’s momentum. Monthly job gains averaged 250,000 per month from December 2011 through February 2012, before averaging barely 100,000 in March through May.

The unemployment rate—after plummeting from 8.9% last October to 8.1% in April—inched back up to 8.2%. This has raised concern that the economy will stall in mid-2012 as it did the previous two years, at least in terms of job growth.

Of course there are risks, but it’s unlikely this year’s slowdown will be as marked as in the previous two years. Consumer spending is much stronger, and it constitutes about two-thirds of gross domestic product.

Although it won’t be a boom, here’s why we expect household spending to hold up:

Employment gains: Of the 8.8 million jobs lost during the recession, about 3.8 million have been regained. There’s still a long way to go: We’re about two years from getting back to prerecession employment levels. Although the jobs picture isn’t great, it’s at least moving in the right direction.

Reduced debt burden: After peaking at almost 125% in 2007, the ratio of total household indebtedness (mortgage and consumer credit outstanding) to annual disposable income has fallen to just above 100%. Although the overall average still has room to improve—it stood at less than 85% before the mortgage explosion of the past decade—more households have experienced enough improvements in their balance sheets to begin taking on more debt.

Some of this increased willingness to borrow has resulted in stronger consumer credit growth during the past five months—more than three times the rate of the previous year. Unfortunately, credit unions haven’t seen as much of a surge in consumer borrowing as have some other lenders.

Improved consumer confidence: Although consumer confidence levels aren’t much higher than those usually associated with recession, consumer confidence is considerably above where it has been for the past four years. If major headlines don’t derail confidence, it should continue to improve through the rest of the year, as fundamentals continue to strengthen. There is, however, significant concern that political wrangling over the “fiscal cliff” in the fourth quarter could reverse this.

Demand backlogs: During the recession, households sharply trimmed spending—particularly on durable goods, such as autos. This implies a growing need to spend, to replace worn-out goods. In the four years since the recession started, for example, the cumulative reduction in new-vehicle sales amounts to about one year of pre-recession sales.

A large portion of those sales are lost forever, but some were merely postponed. With improving balance sheets, borrowing ability, and consumer confidence, households will increase spending for the next few years.

Although the household sector will provide impetus to the economy this year, there are, of course, risks. If the Eurozone experiences a full-fledged financial crisis rather than merely a recession, things could turn ugly.

Also, there’s significant worry about how Washington, in the fall and winter, will address the grave budget issues facing the country. Congress will need to compromise to deal with expiring tax cuts, the debt ceiling, and sequestration from the last debt ceiling nonsolution. Compromise is one thing Washington seems unable to achieve.

Normally, we’d expect a recovering consumer sector to be good for credit unions, with its resulting growth in consumer borrowing. Until very recently, however, nonmortgage loan growth at credit unions has been very soft.

Fortunately, loan growth so far this year isn’t quite as weak as it was during the previous two years. If consumer spending continues to slightly outperform the rest of the economy for the balance of the year, credit unions will have an opportunity to increase loan balances.

BILL HAMPEL is CUNA’s senior vice president of research and policy analysis/chief economist. Contact him at 202-508-6760.