Bill Hampel

Economists offer bullish outlook

Hot topics from CUNA’s Economics & Investments Conference.

September 22, 2016

At CUNA’s Economics & Investments Conference this summer, analysts presented their views on the economic outlook for the next few years, and attendees generated a list of takeaways.

Participants were pleasantly surprised with the economists’ rosy outlook. Of course, a group of optimistic economists might be cause for deep concern.

There are a number of reasons to wonder whether the economic recovery that began in 2009 will last much longer: Gross domestic product (GDP) growth has slowed from 2% a year over the past five years to only 1.2% over the past four quarters, troubled economies abroad are dampening U.S. growth, the labor force participation rate remains low, and the stock market showed signs of peaking earlier this year.

Despite these headwinds, virtually all of the economists at the conference believe the U.S. economy is poised to resume a growth rate of 2% or more for at least a couple more years.

The weak growth of the past year is largely the result of an inventory drawdown, and masks the underlying strength of demand.

Final, or aggregate, demand has been growing at almost 2%. If that continues, once inventories stabilize, GDP growth likewise will grow at close to that rate.

The outlook for consumer spending remains positive. Household debt burdens are low, and the housing and stock markets have recovered.

Six million more people work now compared with before the recession, and recently many of these new jobs are relatively good-paying. Also, there are still significant demand backlogs caused by postponed spending on durable goods during and after the recession.

One speaker described the situation as a “tug of war” between a fairly robust U.S. economy and much weaker growth overseas.

None of the economists expects a booming economy. But chances for a recession any time soon are low.

Another hot topic at the conference was interest rates. Some attendees suggested we might just want to accept the fact that interest rates will remain at their current low levels indefinitely, and that we’ll never return to “normal.”

Most presenters felt differently, believing interest rates are poised to increase, albeit moderately, with the next federal-funds rate increase coming in December and at least two more hikes next year.

That would leave rates low by historical standards, with further room for increases over the next few years.

While the most likely outlook forecasts gradual increases in both short- and longer-term interest rates (not necessarily equally across maturities), attendees decided there is still good reason to model and prepare for more significant rate changes, both up and down.

The economists suggested that current low interest rates in the U.S. are caused largely by foreign central bank actions. To stimulate their weak economies, foreign central banks are lowering short-term rates—to negative territory in some cases—and are buying up longer-term bonds (quantitative easing).

This causes investors in those countries to seek higher yields elsewhere, such as in the U.S., which drives down interest rates here. It is this sensitivity to foreign markets and foreign central bankers’ actions that could drive U.S. interest rate changes.

If the economies of Europe weaken even further (Brexit?), or China and Japan continue to disappoint, further foreign central bank stimulus could push U.S. interest rates even lower.

Conversely, a pickup in overseas growth would induce central banks to back off, pushing up their interest rates and inviting investors to return to their domestic markets. That could cause a pretty sharp increase in longer-term U.S. interest rates.

Again, dramatic changes in U.S. interest rates are unlikely. But they certainly are possible, and credit unions should be prepared.

BILL HAMPEL is CUNA’s chief economist and chief policy officer.