A recession is coming. The only question is when.

Fortunately, it won’t be as severe as the Great Recession of 2008-2009.

That’s the consensus of three economists who addressed the 2023 CUNA Finance Council Conference Tuesday in Anaheim, Calif. Amy McGraw, vice president of marketing and chief experience officer at $988 million asset Tropical Financial Credit Union in Miramar, Fla., and Christine Messer, chief financial officer/senior vice president of finance at $729 million asset Heritage Family Credit Union in Rutland, Vt., moderated the session.

Marisa DiNatale, senior director at Moody’s Analytics, offered a more optimistic forecast than her fellow panelists. “Our forecast is no recession this year, with higher chances as we go into 2024. We’re calling it a ‘slow session,’ with gross domestic product growth of around 1%,” she says. “The labor market has been incredibly resilient, although we expect job growth to slow significantly in the next couple quarters.”

While inflation remains high, DiNatale believes the Federal Reserve won’t raise interest rates again this year and will lower them next year. “This will allow the Fed to thread the needle between managing inflation and hurting the economy. The economy is very fragile, and any major force could throw it off, particularly the debate over the debt limit. A lack of action on the debt limit causes a loss of confidence on the part of businesses and consumers.”

Other areas of risk include fragility in housing and manufacturing, says Lindsey Piegza, chief economist at Stifel. While she agrees the labor market remains strong, wage pressures are creating a vicious cycle of sorts: A tight labor market results in higher wages, leading companies to raise prices, which requires people to earn more to buy products and services.

Plus, inflation remains a concern. “There’s still no sustainable level of disinflation, and I’m not convinced we’re heading to the 2% inflation target,” Piegza says. “This is the Fed’s primary focus. If the Fed moves to the sidelines with rate hikes, it will be a temporary pause with one or two rate hikes this year.

“The biggest risk,” she adds, “isn’t if the Fed raises rates too much. The bigger risk is that the Fed doesn't raise rates high enough and allows inflation to become entrenched in the economy, forcing us into a deeper recession. The Fed was late to the inflation-taming party. They won’t make that mistake again. It’s better to act now.”

Bill Hampel, consultant at MDB Hampel LLC, agrees inflation won’t subside soon. He says decades of low inflation left most people surprised by the striking rise in inflation.

“The Fed feels bad that they let the inflation genie out of the bottle,” he says, adding that it wasn’t the Fed’s fault. The key factors: COVID caused supply shocks that drove up prices and led to government stimulus, and the war in Ukraine pushed up energy prices.

“Getting that genie back in the bottle is the Fed’s No. 1 policy goal,” Hampel says, placing odds of a recession this year at 50% and next year at 80%. “The headwinds are so strong.”

What does this mean for credit unions? High rates mean high cost of funds and disintermediation of member funds, according to Hampel.

“Liquidity pressures will continue next year and your margins will be lousy,” he says. “Fortunately, credit unions have plenty of capital and they won’t dilute it with asset growth.

“The next couple of years will be rough. There will be rainy days for credit union earnings, and liquidity pressures will persist. Don’t do any crazy things to boost the bottom line in the short term. Draw down your capital a bit to live another day.”