CUNA Dims Economic Expectations for 2020

A recession is not certain, but seems much more likely by 2021.

Questions remain about the economic outlook. (Source: Shutterstock)

Credit unions should be preparing for a sharp slowdown in growth next year and a higher likelihood of recession by the end of 2021, according to a CUNA forecast released Thursday.

The new set of CUNA forecasts shows sharp declines expectations for U.S. economic growth and credit union loan growth in 2020, compared with forecasts released in April and June.

CUNA Senior Policy Analyst Samira Salem presented the gloomier outlook in CUNA’s monthly Economic Update video released Thursday.

Her colleague, CUNA Senior Economist Jordan van Rijn had signaled in September’s Economic Update that the economic team had started to adopt a more pessimistic outlook on the economy.

The forecast numbers were the product of a meeting in the first week of October between CUNA economists and Steve Rick, chief economist for CUNA Mutual Group.

Major changes in expectations for 2020 include:

Meanwhile, savings rates are likely to move in the opposite direction. Rick, of CUNA Mutual Group, said savings are now expected to rise 7% this year, up from a 6% forecast in June, and rise 8% in 2020, up from a 6.5% forecast in June, “as members save more due to rising concerns regarding an economic slowdown.”

CUNA’s forecast for economist growth for this year remains 2.1%, declining from 2.9% in 2018 and in line with the 2% economic growth that is the new expected normal for the U.S. economy.

Salem said next year’s growth forecast of 1.5% is significantly slower, but still represents an economy in expansion.

“If we’re wrong, and there is a recession, we believe it will be short-lived and not very deep,” she said.

The economy is in its 11th year of expansion, the longest in U.S. history. Nonetheless, Salem said the economy is fragile, and one of the biggest reasons is the unforced errors of policies that have led to economically damaging trade disputes.

Other reasons including declining U.S. manufacturing, lower business investment and slowing growth in other major economies.

Sunny consumer attitudes and “accommodative policies of the Federal Reserve” are the main forces bolstering economy.

“If something goes off the rails, and consumer confidence is negatively affected, then a recession in the next two years is much more likely than it has been for quite some time,” she said.

Wages were rising at a modest yearly rate of 3.1% this most of year, and 2.9% in September.

“This is not the level of wage increase that you would expect in an expansionary economy with a tight labor market,” she said. “A healthy rate of wage growth not adjusted for inflation is about 3.5%.”

Loan growth is closely tied to economic growth, and the slowdown in credit union lending has been led by sharp deceleration in consumer borrowing for cars and a more modest slowdown in first mortgages. The forecast for loan growth this year fell from 8% in January to 7.5% by June and 6.5% in October.

Those categories, which together account for 85% of credit union loan portfolios, will continue to slow in 2020.

Auto lending has been driver in higher membership growth rates in recent years. With fewer auto loans being originated and more being paid off, membership growth rates will also slow from the record level of 4.4% in 2018 to 3% this year and 2.5% in 2020.

While CUNA is increasing its forecast for ROA this year to 0.92% from its 0.85% forecast in June, it dialed back on 2020 ROA primarily because it expects a decline in net interest income from slower loan growth and lower margins.

“This forecast assumes that we make it through the next couple years without any resolution or worsening of trade tensions.

“If trade tensions are resolved quickly and favorably, then we could see much more positive outcomes than we forecast in economic growth, interest rates, loan growth and deposit growth.

“If trade tensions worsen,” she said, “a recession is more likely.”

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