ORLANDO, Fla.–The American economy has more than a few things in common with a movie classic, according to one economist, who described the current state of affairs as a “Griswold Economy.”
Like ‘Vacation,” which gave us Chevy Chase as Clark Griswold, something about the economic recovery isn’t quite right, but after much stumbling and bumbling, things are turning out all right in the end.
Mike Schenk, VP-economics and statistics with CUNA, said that unlike previous recoveries from recessions the “Griswold Economy” is running hot and cold, is full of data that lacks any clarity, has the Fed concerned that any false move might spell disaster, and consumers are definitely outside their comfort zone.
Mike Schenk speaking to CUNA OpSS and Tech Council meeting in Orlando
“Every time if feels like the economy is going to take off, what happens? The Greek crisis. The sequestration. Snowmegedden. ISIS. The wheels fall off,” said Schenk in remarks to the joint annual meeting of the CUNA Operations, Sales and Service Council and the CUNA Technology Council. “It has not been anything like the normal post-World War II economic recovery. You can’t say anything with a high degree of certainty.”
For instance, Schenk noted that in the five years since 2009 economic growth has averaged 2.4%, but based on trends of the previous 10 recessions, growth should be 4.1%.
Schenk pointed to Federal Reserve projections for the economy in which GDP underperformed projections every time, including being lower than the low-range estimates that were made.
Despite perceptions that the economy is struggling, Schenk said an “economic snapshot” shows the numbers are good, including:
- The economy
- is growing at a healthy rate. “Things are actually in pretty good shape and as a result our outlook is fairly rosy in the overall scheme of things.”
- Labor markets are nearing full employment, which is right around the 5% threshold.
- Inflation is tame and likely to stay that way.
- Consumer confidence is rising and consumer balance sheets are in good shape.
- China is clearly the biggest wild card.
Rosy Predictions
Schenk said he and CUNA are projecting even faster growth for 2016. And that takes into account that China “wild card. Schenk noted that exports to China are about $120 billion, or 6% of the U.S. total exports. “So it’s a rounding error. We are concerned that what happens there does make the dollar stronger. We’re also concerned that in efforts to stabilize the economy (China has) been selling big chunks of their portfolios, which pushes rates up for the U.S. when selling Treasuries. But when China devalues, other investors get worried and there is a flight to safety, which is U.S. Treasuries. We’re also not sure how transparent the Chinese are when reporting all of this data. But all in all, we do not see this as a game changer.”
Like others, Schenk said his forecast for when the Fed will increase rates has been missed, although some analysts are predicting the Fed will move before year-end.
“Increasingly, now markets are predicting the Fed will move next year. A year from now when you meet there is about an 85% probability that rates will have increased by that time. But no one expects to see dramatic increases.”
In terms of consumer economic trends (which drive 70% of the U.S. economy) and CU members, Schenk is forecasting:
- Solid employment gains and low inflation.
- Income gains will outpace inflation.
- Home price will increase with lofty (though lower) equity valuations.
- There will be declining debt exposures, but growth in total debt. The average debt per person peaked at 125% of take-home pay during the height of the real estate bubble. “Now it’s down dramatically to about 96% of take-home pay. The monthly outlays for paying debt today are also at all-time lows. That’s pretty healthy and long-term data shows that people are really in pretty good shape from a debt perspective.”
- High and increasing net worth. “We believe there is a bunch of pent-up demand in the marketplace.
- There will continue to be lots of consternation surrounding retirement.
Forecast Keeps Going and Going and Going...
Schenk shared a slide of economic forecasts that he said he hasn’t had to change in four years—another good sign.
- There is very strong membership growth (the U.S. population grows at rate of 1% per year; CUs have been growing 3% annually. “It’s astounding. A lot of people say, ‘Wait, isn’t this because we’re selling a lot of cars and people are coming in through the indirect channel. And the fact is we don’t have the data. It looks to me like we added about one-million indirect loans over the course of the last year, so that’s about one-third of the three-million new memberships. Some people think those are not quality relationships and those are not good members. But I’ve talked to plenty of lenders who are big into the indirect market who say these are good members who come back.”
- Loan growth is high, and will continue to be.
- Savings growth will remain low.
- There will be vastly improved asset quality.
- Lower earnings (with low and declining interest margins). “We have never seen a year in credit union history where the dollar amount of savings declined, but if that were ever to happen I think this is the environment where it might happen when bank money market yields are higher.”
“We see a flattening of the yield curve on loans and deposits. The baseline forecast is the idea that net interest margins will be under pressure going forward,” said Schenk. “Our outlook: We think that loans will continue to grow at double-digit rates. If we are correct and 2016 comes in with 10% increase in loan balances, this will be the first time we’ve seen three years in a row of double-digit loan growth.”
About that Good News
Schenk offered a caveat about all the positive credit union trend lines: the industry numbers don’t actually apply to all credit unions.
“With all of this data the really important thing to recognize is I’ve been talking about national averages and those look nothing like what the typical CU is experiencing,” noted Schenk. “There continues to be tremendous variation. And the biggest variation is by credit union asset size.”
Schenk used graphics showing that growth is negative to negligible in CUs of up to $100 million in assets, which represent 75% of all credit unions.
Meanwhile, CUs of $1 billion in assets and more have a 100-basis point cost advantage over CUs that are smaller. “You can do a lot with that; you can grow members faster; you can advertise, you can give people better deals. The difficulty in competing in the indirect channel constrains small CU new auto loan growth.”
Nevertheless, like the Griswolds who finally made it to Wally World and got to enjoy the park even though it was closed, Schenk has a positive view: “This has been a recovery unlike other recoveries. But we still believe the economy is on a very good path and credit unions and credit union members will benefit.”