AACUC Coverage: Economist Shares ‘Big Concerns,’ Some Reassurances & Four ‘Sure Bets’ | 8/28/22

ST. PETE BEACH, Fla.–Some big concerns, some reassurances, and four “sure bets” for the economy were shared with credit union leaders here.

Mike Schenk addresses the meeting

The economy remains in “dicey” territory with a lot of “volatility” according to Mike Schenk, CUNA’s chief economist.

Schenk told the African American Credit Union Coalition’s annual conference here how in the time leading up to CUNA’s GAC in 2020, just prior to the onset of the COVID lockdowns, he was worried about a number of things, the biggest of which is the U.S. economy’s “speed limit.”

That speed limit is driven by how many people are in the labor force plus population growth, which has slowed. Not only are fewer people entering the workforce, but 10,000 people are reaching retirement age every day in the U.S. and the country has also put in place immigration policies that limit newcomers, all combining to put a governor on that economic speed limit.

“The overall speed limit on economic growth in the U.S. is just under 2% and the long run average is closer to 3%,” said Schenk. “This is fundamentally important to credit unions and a huge challenge. If you look at the data, when the economy is growing, credit union loans are growing. The reverse is also true.”

Schenk said he has also had a second concern, one he has held since joining CUNA three decades ago, which is growing economic inequality among Americans.

“About three quarters of Americans live paycheck to paycheck,” Schenk told the meeting. “This is a trend we have long been concerned about. My concerns around this issue have become more pronounced in wake of the COVID pandemic.”

Looking more broadly, Schenk noted the unanticipated shocks to the economy from the omicron variant and the Russian invasion of Ukraine continue to affect forecasts and inflation.

A ‘Horrible Record’

Schenk said he expects the Fed will push its benchmark rate to 3.50% by year end as it seeks to tame rising prices. But that may not be the answer, he said.

“The Fed has a horrible record of orchestrating soft landings,” Schenk observed. “So that is the concern around the Fed’s approach to fighting inflation this time around.”

Schenk said he does not believe the economy is in a depression, citing increases in gross domestic income and improvements in employment and the labor force as among the reasons.

“I am an optimist generally,” said Schenk. “But it really does feel to me that the level of pent-up demand in the economy is meaningful and should be able to bring us through the next few years without a recession. Members are in pretty darned good shape overall. Another reason I think we may avoid recession is consumers are not, on average, saddled with debt as they typically are when we go into recession.”

He noted household debt service payments as a percentage of disposable income remains quite low.

Nonetheless, as has reported, Schenk and CUNA’s economists have cautioned credit unions that there will likely be growing pressure on bottom lines, although robust loan growth (10% for the first half of the year) has helped reduced some of that pressure.

Other ‘Big Concerns’

Among Schenk’s other “big concerns” is what he called “big dislocations.”

He used a graphic showing how employment has changed over time to illustrate where his concerns lie, as the COVID crisis created a much more severe downturn in labor markets followed by a fast recovery.

“But the averages hide what’s really going on,” said Schenk, noting that a “significant” number of people in hospitality industry lost jobs. “Millions of our fellow Americans are actually in a lot worse shape than they were pre-pandemic, and that’s a big deal.

Four Sure Bets

Overall, Schenk said there are four “sure bets” when it comes to the economy:

  • Very fast near-term loan growth. Overall loan growth was 10% during first six months of year, verses CUNA’s full-year forecast of 8%. That number is driven largely by auto loans.

  • Sticky savings balances. “If you liked your net worth ratio pre-pandemic and expect it to naturally return to that level, we don’t think that’s going to happen. If you liked it, you are going to have to build it back up the pre-pandemic way, retained earnings, and those will be under pressure.”

  • Shifting risk profiles. Schenk forecast delinquent loans will not rise dramatically, but they will rise. “We are seeing in some large institutions liquidity that is not as strong as we would like to see.”

  • More obvious bottom-line pressures.

Published article available here.