CUNA Mutual Economist: Expect Recession in 2020

An economist for credit unions said Thursday that credit unions should keep a close watch on their lending standards as the U.S. economy heads for a mild recession in 2020.

Steven Rick, economist for the CUNA Mutual Group in Madison, Wis., said consumers have been borrowing more than they make to satisfy pent-up demand, but they will be forced to start saving more and pay down their debts.

Recessions almost always start when growth in savings exceeds growth in loan portfolios, and end when the relationship reverses, he said. Those rates for credit unions coincided with the start of mild, short-lived recessions in 1991 and 2001 and the Great Recession that began in 2007. However, a dip in 1998 was not accompanied by recession.

Since 2013, credit union loan portfolios have been increasing at a rate faster than savings growth. CUNA’s Economic Update released this month shows a 9% rise in loans and a 7% rise in savings this year. Next year it forecasts that they will both grow 8%.

By 2020, Rick expects loan growth will dip below savings growth.

“People are loading up: buying new cars, buying appliances, buying new furniture. But the day of reckoning is coming when they have to pay back those loans,” he said. “It really is credit that drives business in this country.”

Recessions are usually defined by two quarters of back-to-back economic contraction. The economy has been growing since the last recession ended in 2009.

CUNA, also of Madison, and CUNA Mutual both forecast economic growth at 2.8% this year and 2.5% in 2019. Rising oil prices and wages will stoke inflation above the Fed’s target of 2% due to rising oil prices and rising wages as unemployment falls to a low of 3.7% by the end of 2019.

The Fed will raise interest rates this year and next, while the fiscal stimulus from the federal budget Congress approved this year will play out, creating “another drag on the economy,” Rick said.

The resulting recession will be relatively mild—on the order of the recessions that began in 1991 and 2001. “It won’t be anything like the 2007-2008 recession.”

Rick said most credit unions will be in a good position to ride out a mild recession, but should avoid loosening credit standards in the expectation that current conditions will last indefinitely.

“There is a short-term credit cycle,” Rick said. “Once that credit slows down, that’s when people will start to lose some jobs, unemployment will go up and charge-offs will go up.”