By Ray Birch
ONTARIO, Calif.—Are negative interest rates ahead? One economist is telling credit unions to at least be prepared for the possibility, while also offering some other caution flags to be watching.
“Corporate profits are flat, credit union net interest margins are not doing great, and smaller bank net interest margins are not improving like the big banks,” said Elliot Eisenberg, chief economist for economic consultancy GraphsandLaughs. “Right now, net interest margin is not your friend. You have got to keep this in mind.”
What credit unions must also keep in mind, added Eisenberg, is how rates could fall quickly should the U.S. ever enter into a recession.
“I would think about negative interest rates. The Federal Reserve doesn’t want that to happen. And I don’t think it will happen. But it’s worth thinking about,” he said during a CU Direct webinar on the state of the economy.
As far as the Fed moving on interest rates in the final quarter of 2019 and next year, Eisenberg said he expects maybe two more moves.
“I think the Fed maybe cuts rates one more time this year and one next year,” predicted Eisenberg. “However, if we hit a recession, rates go to zero really fast.”
Not on ‘Recession Watch’
But Eisenberg, an animated and popular speaker to numerous credit union meetings, said he is “not on recession watch,” primarily because consumers are “going gangbusters right now.”
“It’s hard to have a recession when consumers are doing well,” he said. “Household wealth is at an all-time high,” Eisenberg pointed out. “It is $110 trillion, up from $70 trillion 10 years ago. Collectively, households have never been better.”
That isn’t too say there isn’t an issue of concern looming beneath the surface, in this case the growing household debt, according to Eisenberg.
“It’s at nearly $1.6 trillion,” he said. “That will not cause a recession, but it will bring about slower GDP growth because people have less money to spend as they pay down their debt.”
Eisenberg is forecasting that for the remainder of the year the U.S. economy will hover around 2% GDP and fall to possibly 1.8% next year.
“Again, I am not on recession watch for the next nine to 12 months. Beyond that I don’t know,” he said. “The yield curve inversion makes me a bit concerned, so I pay attention to it.”
Dr. Eliot Eisenberg
A Recession That Lingers
What could contribute to some prolonged difficulties down the road, according to Eisenberg, is the arrival of a recession that lingers for a longer-than-usual amount of time.
“Things have been great for 10 years,” he said. “Every time a recession comes, things, of course, get worse. Out of a recession they generally get better. Except now. Starting in 2016 our fiscal situation deteriorates. This is unprecedented outside of a recession…So while I think this next recession won’t be very bad, because there is not anything substantially out of whack with the U.S. economy, it will be harder to get out of it because we won’t have the fiscal firepower we had in the past.”
Delinquencies Likely to Rise
Looking at the latest data, Eisenberg suspects delinquencies, while still at historic lows, will continue to rise, and possibly markedly. His biggest concern is credit cards and auto loans—particularly auto loans to subprime borrowers written by finance companies.
“Cars keep getting more expensive, and even though new car sales are falling, the total dollars in auto loan portfolios are increasing due to the size of the loans,” explained Eisenberg, noting the number of borrowers upside down is increasing to a very sizeable segment. “The non-prime loans are performing much more poorly than prime loans. It’s generally now a non-prime story.”
Eisenberg said finance companies are largely the culprits in such loans, with bank and credit union non-prime loans not seeing the same sharp rise in delinquencies.
“But my advice to you is be careful going forward with loans to people with lower FICO scores,” he said.
Also Worth Watching
Other notes from the CU Direct webinar:
- Small business confidence is declining today from its peak in 2018
- The housing market is slowing. “The numbers are not bad but they are not going up. The market is flat”
- New auto sales continue to trend down, and General Motors is closing some plants
- RV sales are down
- Heavy truck sales are down
- Be wary of the refinance market. “The refinance rate is beginning to burn out. There still is refi activity, but if you jump in now expect to be out in four to five months. It’s a reasonable play right now, but a short-term play