This year opened with stock markets in turmoil, a slowing Chinese economy, and oil prices falling below $30 a barrel—all of which might affect credit union operations.
Concerned investors overreacted to the news of a slower Chinese economy, which partly explains the stock market turmoil in the U.S. and around the world. China’s economy is not immune from the business cycle. Its economic growth rate eventually fell from the double digits to the single digits as it experienced structural changes.
While it can be argued that China’s economic slowdown has both direct and indirect effects on the U.S. economy, a slowing Chinese economy has marginal effects on credit unions. Moreover, it is difficult to aggregate the effects of China’s economic slowdown in future U.S. economic growth.
Unlike banks, credit unions have limited exposure to the daily gyrations in the stock market. The stock market turmoil in January was not a viable indicator of a U.S. economic slowdown.
Studies have shown that a long-run relationship—not short-run—between stock markets and economic growth exists. The U.S. economy remains poised for continued growth, although challenges remain.
The latest estimate by the Bureau of Labor Statistics shows that employers added 151,000 nonfarm jobs in January. This brings the unemployment rate down to 4.9%—a far cry from the 10% unemployment rate in October 2009.
While the labor market is solid, more low-wage jobs were added and high-wage jobs were lost. Fifty-eight thousand retail jobs and 44,000 jobs in leisure and hospitality were added in January. This suggests that consumer spending in these sectors has been improving and necessitates hiring to support demand.
This should have positive effects on credit union credit card business and debit interchange fees. The downside is the average hourly wage for these jobs is less than $15.
Forty four thousand jobs in mining and logging (which includes jobs in the oil industry) and 20,000 jobs in transportation and warehousing were lost in January. These jobs pay an estimated average hourly wage of $26.74 and $20.95, respectively.
Despite lower oil prices that have added around 1% of gross domestic product to households’ purchasing power since mid-2014, jobs in the oil and gas industry decreased 7.9% over the past 12 months. The current oil market rout will impact credit unions, particularly those directly linked to the oil and gas industry.
Loan growth in the 10 oil-producing states remains positive but decreased 1.97 percentage points on average from year-end 2014 to September 2015 as oil prices dropped. Savings growth increased 0.71 percentage points over the same period.
The ongoing imbalance between the supply of and demand for oil will continue to influence price movements. Weak economic conditions in Europe, China, and emerging markets are tempering the demand for oil.
Advances in technology have contributed to an increase in U.S. oil production in recent years, particularly in nontraditional oil production such as shale oil. Clearly, higher productivity in the oil industry has led to higher supply.
But the current low crude oil prices won’t sustain an increase in supply, as new investments are unprofitable. U.S. oil production growth has been declining since April 2015.
While the economy needs to add entry-level jobs to accommodate new entrants into the labor market, faster and more broad economic growth—leading to a higher rate of increase in the demand for goods and services—would usually lead to higher-wage jobs, all else equal.
Wage-led growth would have larger net positive effects not only on credit union operations and working-class members but on the macro economy.
PERC PINEDA is CUNA’s senior economist. Contact him at 608-231-4285 or at firstname.lastname@example.org.