CUNA’s Schenk: Mild recession likely

The economic bad news for credit unions: A recession is likely in 2023. The good news: It’s unlikely to have the decimating effect of the most recent U.S. recessions.

That’s the forecast from CUNA economists as delivered by Mike Schenk, CUNA chief advocacy officer for policy analysis and chief economist, Tuesday at the CUNA HR & Organizational Development Council Conference in San Diego.

CUNA economists put the chance of a recession at roughly 55%. “If it does occur, it will be relatively mild: short, and not very deep,” Schenk says. “It won’t look anything like the COVID crisis or the financial crisis of 2008.”

Schenk added that the banking crisis related to the Silicon Valley Bank collapse and the U.S. budget fight will affect the economy. The blowback from the Silicon Valley Bank situation has caused financial institutions to pull back on lending at a clip that would equal a 50 to 75 basis point increase in the federal funds interest rate.

Furthermore, Schenk says if the budget situation in Washington, D.C., is drawn out in a months-long process, it will have a negative impact on the economy equaling a 10% to 15% decline in consumer confidence.

CUNA economists expect the Federal Reserve to raise interest rates at least one more time in 2023. Schenk says the possibility of a rate increase is directly related to the Fed’s policy commitment to bring inflation down closer to 2%. 

Expecting those efforts to increase the unemployment rate from 3.5% to roughly 4.5%, Schenk says, “That implies 1.5 million more people out of work."

Overall, CUNA economists expect the U.S. economy to grow 0.5% in 2023, down from 2.1% in 2022.

Meanwhile, year-over-year headline inflation measured by the Consumer Price Index (CPI) is expected to ease from 5.0% today to 3.5% by year-end, according to Schenk’s team.

The net effect of this economic activity will be a squeeze on interest rates and margins for credit unions, as indicated is the predicted spread between the federal funds rate (5.1%) and the 10-year Treasury yield (3.1%). CUNA economists predict that spread to be -1.6% in 2023.

The federal funds rate serves as a proxy for funding costs, while the 10-year Treasury represents financial depositories’ asset yields.

“Net interest margins will be under more obvious pressure going forward,” Schenk says.