4 ‘sure bets’ for the economy

While the U.S. may avoid a recession in the next year, consumers will continue to face the underlying challenges of an uneven economy fostered by the global pandemic and political turmoil following Russia’s invasion of Ukraine, according to Mike Schenk, CUNA’s chief economist and deputy chief advocacy officer for policy analysis.

Schenk, speaking at the 2022 African American Credit Union Coalition Conference in St. Petersburg, Fla., says the economy continues to grow despite the Federal Reserve’s recent efforts to slow inflation by increasing the federal funds rate.

“The level of pent-up demand in the marketplace is meaningful and could bring us through the next year and a half without this turning into an actual recession,” he says. “About two-thirds of U.S. economic activity is related to consumer consumption. It's related to what credit unions do—lending—what our members do—spending and borrowing—and how we interact from an economic perspective.”

He notes that consumers aren’t saddled with debt as they typically are when a recession looms.

“Overall, consumers have more disposable income,” Schenk says, in part because millions refinanced their homes during the pandemic, folding higher-rate debt into long-term, low-rate mortgages. “That’s meaningful in that they can more easily meet their debt obligations and even take on new debt obligations.”

Schenk also says the supply chain disruptions that have plagued the economy will be less impactful in the next six months based on Federal Reserve district bank manufacturer surveys.

He offers four “sure bets” for his economic forecast:

1. Fast near-term loan growth. While CUNA economists initially predicted 8% loan growth for 2022, loans have increased 10% in the first half of the year alone, a 20% annualized rate. Driving this growth are auto loans, which have jumped an “incredible” 24% annualized rate in the last six months, Schenk says.
2. Sticky savings balances. Although consumers are spending at a fast clip, the savings consumers squirreled away during the pandemic is unlikely to dry up. This suggests credit union capital ratios won’t “naturally” return to pre-pandemic levels but will need to be rebuilt the “old-fashioned way” through retained earnings, he says.
3. Risk profiles are shifting. Delinquency rates have begun to rise at credit unions after reaching all-time lows during the recession. Interest rate risk is another big concern. As the Fed raises interest rates to ease inflation, credit unions funding costs tend to rise faster than asset yields.
4. More obvious bottom-line pressures. Again, Schenk noted the increased pressure on net interest margins and on noninterest income. Credit unions also face potential bottom-line challenges with the credit card interchange threat, nonsufficient funds fees under a proverbial microscope, and diminished gains on mortgage sales due to lower originations.

In addition, the combination of fast-rising personnel and technology costs and slower asset growth suggest operating expense ratios will drift up.

Another cloud on the horizon: underlying weak pockets in the uneven economy. While unemployment has largely recovered from near all-time highs at the outset of the pandemic, many Americans, especially those in the hospitality sector, remain unemployed at rates higher than during the Great Recession of 2008.

“That's impactful,” Schenk says. “Millions of Americans are financially unwell and many are actually in a lot worse shape than they were pre-pandemic. That's a big deal.”