PLANO, Texas–The U.S. economy is in the midst of a “sugar rush” right now, but that feel-good state of affairs could change 18 months from now, one economist will be telling credit unions who
are set to meet here.
But not to worry. Even the crash from the sugar rush won’t be as anything approaching what Americans experienced during the recession of a decade ago, former CUNA Chief Economist Bill Hampel plans to tell credit unions gathered here for Catalyst Corporate’s Future Forum.
Hampel will be speaking on the “The Economy's Impact on Credit Unions.”
“Over the next few years, the economy will become a bit more fragile than it’s been,” said Hampel. “Inflation induces interest rate increases. Interest rate increases have historically caused most of the recessions since World War II. If we face a cyclical recession, it’s going to be nothing like the Great Recession. It will be much milder, and many won’t even notice.”
If the U.S. economy is looking great right now, what could cause it to fall into a recession in the near future?
What Full Employment Means
“For eight of the last nine years, we’ve been recovering from the Great Recession,” said Hampel. “We were in a world with low inflation, high but falling unemployment and fairly steady growth. We all knew where the economy needed to go. When the economy has less than full employment, Fed policy tries to encourage full employment.”
However, a little less than a year ago, the economy reached full employment.
“Now that the economy is at full employment, the job of the Fed is more ambiguous,” he said. “What do we do to make sure inflation doesn’t get out of hand? We raise interest rates. Will inflation rise just right, or will it rise too much, too quickly and cause another recession?”
These are the questions on the minds of many economists. But, Hampel stressed this doesn’t necessarily spell gloom and doom.
“It is possible for the Fed to get it just right and nudge interest rates up just enough,” he said. “It’s also likely that since a recession will be milder, we won’t see dramatic changes in consumer behavior. Layoffs won’t be nearly as long, nor as large. Consumers shouldn’t respond as much.”
Be Prepared, But Not Overly Risk Averse
However, Hampel acknowledged that because the last recession was so severe, just the hint of another one might make people skittish. In the meantime, Hampel suggests credit unions shouldn’t adjust financial operations or policies based on a forecast, according to Catalyst Corporate.
“Credit unions should be prepared,” he said, “but not so risk-averse that they are fully immune from any impact. Successful credit unions must manage interest rate risk. One way to do that is with ALM scenario modeling.”
He added that credit unions completely insulated from any change probably don’t have business.
“Expect a continued rise in interest rates over the next few months,” he said. “The Fed controls the overnight rates, not the long-term rates, so credit unions can expect a flatter yield curve. When modeling scenarios, make sure your credit union anticipates what a flattening yield curve will look like.”
One other challenge credit unions may face in a full-employment environment is finding and retaining their workforce, according to Hampel.
“Finding entry level workers will be difficult,” said Hampel. “Staff retention is going to be more important for the next couple of years, because employees are going to have more options. In a weak economy, people don’t quit their jobs. In the current market, job switching is more attractive, and it’s easier to take the risk to get a new job.”
For more info: catalystcorp.org/r/forum