The Fiscal Cliff: What’s the Worst-Case Scenario for CUs?
The fallout wouldn’t be pretty for CU balance sheets.
CUNA Senior Economist Steve Rick doesn’t believe the U.S. economy will fall off the fiscal cliff. But if it does, the fallout won’t be pretty for credit union balance sheets.
The resulting $600 billion “fiscal de-stimulus,” 4% of gross domestic product, would push the fragile U.S. economy back into recession and cause the unemployment rate to rise to 9%, Rick says.
If the Bush-era tax cuts expire, the average consumer’s disposable income would fall by $2,000, causing a corresponding drop in credit union deposit and asset growth. Falling consumer confidence would result in declining consumer and business investment spending, and would dampen loan demand.
“Members wouldn’t want to risk taking out new loans because they’d be afraid of losing their jobs,” Rick explains. “So loan growth would be significantly curtailed; probably back to the levels we saw in 2009, 2010, and 2011. So we could go back to zero loan growth.
“That would affect our income,” he continues. “Fewer loans on the balance sheet and more money in the investment portfolio would mean dropping net income for credit unions. That would have a severe impact on the bottom line going forward.”
Lower income would translate into slower capital growth, Rick says.
Most pundits believe, however, that Congress will reach an agreement that raises taxes on the wealthiest Americans, limits some deductions, and extends the Bush-era tax cuts for the middle class.
“The probability is better than 50% that we’ll kick the can down the road with some modest spending cuts and tax increases,” Rick says.
If not, credit unions will have to prepare for no loan demand and little savings growth.
“Businesses are postponing big expenditures,” Rick says. “Credit unions would have to do likewise: postponing new branches because they might not be needed if there’s less business coming in. They may have to postpone capital expenditures and hiring because their income may drop next year.
“Everyone is in wait-and-see mode,” he continues. “If no one is spending, that intensifies the recession. It’s a self-fulfilling prophecy.”
If January 1 comes and goes without an agreement, there’s no need to panic, Rick says, as long as a deal gets done soon after. But don’t expect forgiveness from the stock market.
“If there’s no agreement, the markets will punish us,” he says. “The stock market will drop because our political system is dysfunctional, and politics is holding back our economy. Lower stock prices means lower wealth, which basically means people start saving more and consuming less to rebuild their wealth.”
This would create what economists call “the paradox of thrift,” Rick says. “If everyone is saving and no one is consuming, that worsens the recession—a downward vicious cycle.”