The NAFCU Journal: Warning - Speed Bumps Ahead

Some economic indicators hint at an eventual slowdown

By Anne Saita

The slow but steady economic growth of the past decade has helped consumers buy homes, refi nance mortgages, replace aging automobiles and stay employed. But chances are your members are getting nervous — as are your employees, board members and management teams — thanks to a trade war, an upcoming presidential election and record student loan debt levels that are placing potential speed bumps on the road to continued economic prosperity.The NAFCU Journal - Warning Speed Bumps Ahead (2)

“The word on the street is that we’re due,” says Paul Parrish, president and CEO of One Nevada Credit Union in Las Vegas. “So, I guess I’d have to lean toward some degree of slowdown in the coming year. But a recession isn’t just going to start itself. So the question, as I see it, is: What will the trigger be? Your guess is as good as mine.”

In early fourth quarter 2019, we asked several members of the Credit Union Economics Group (CUEG) to surmise what might happen in 2020. At the time, unemployment remained at historic lows, and an ongoing trade war with China was taking a toll on U.S. businesses, especially manufacturers.

Housing and Auto Markets

A major economic indicator is housing. Credit unions need a healthy housing market in order to provide mortgages to homebuyers and to refinance existing loans for homeowners. Those interviewed had been experiencing a strong housing market in their respective regions. “We still have affordable homes,” says D. Samuel Inman, CFO of Community First Credit Union in Jacksonville, Fla. And Inman expects Florida’s population to grow by 6.8 percent in the next several years, compared to 3.3 percent overall nationally, keeping the demand for housing strong.

The NAFCU Journal - Warning Speed Bumps Ahead (1)

His optimistic outlook is echoed by other CUEG members who’ve seen similar upticks in the market.

“Home sales have picked up since the start of 2019, thanks to low rates and a strong labor market,” says Curt Long, NAFCU’s chief economist. “But the really positive development has been increased construction activity, both in permits and starts. That addresses the biggest constraint on the market, which is on the supply side. Inventory levels are more consistent with total sales, and that has led to some moderation in price growth.”

Similarly, the vehicle loans market has been steady the past two years. Parrish sees no reason why that trend can’t continue, especially if interest rates remain low. “A slightly lower-rate scenario, combined with some reasonable stability with other key economic indicators, could create a perfect storm this year for all areas of lending,” he says.

Business Investments and Consumer Sentiments

Chris Shipman, a financial adviser for Dallas-based Catalyst Strategic Solutions, says ongoing economic expansion and business investment throughout the Southwest, and particularly in major metropolitan areas of Texas, are positive indicators of a healthy economy, but “business sentiment could be considered neutral, as potential economic conditions and tariffs have caused some concern.” The tight labor market in particular, Shipman says, could threaten economic stability and growth. “Hiring and retaining employees is a current and growing concern for numerous sectors.”

Inman notes that certain commercial industries, such as manufacturing, will likely pull back on inventory levels for 2020 or 2021 due to concerns of a slowdown and because of digital investments to modernize services.

Apart from inventory and investments, the economy’s perceived strength hinges somewhat on consumer confidence, and that could shift in the coming year, according to Fred Eisel, chief investment officer for Vizo Financial Corporate Credit Union in Greensboro, N.C.

“The consumer is still the main reason the economy is hanging in there despite uncertainty surrounding trade,” Eisel says. “It seems consumer sentiment remains positive, given the positive data in retail sales and still-robust housing. Auto sales have come off their highs in previous years.”

But, Eisel warns, “Wage growth remains stagnant, and this could dampen confidence. The recent manufacturing numbers could spell a much slower 2020 as well, and as long as the trade war continues, consumer and business confidence will have a very difficult time improving.”

Inman suggests credit union leaders review their underwriting, given that some took on more risk or lowered credit standards during the long economic recovery of the last several years, and they may want to pull back a bit.

The NAFCU Journal - Warning Speed Bumps Ahead (3)

Long is a bit more optimistic, despite consumer sentiment falling due to market volatility and various sources of rising political risks. “Households have continued to spend at a brisk pace,” he says. “Their balance sheets are still in decent shape, and as long as businesses keep hiring, there is no reason why the backbone of the economy should deteriorate.”

Trade Wars and Tariffs

For much of 2019, the United States was engaged in a trade war with China. Not only were consumers and manufacturers feeling the pinch from higher-priced imported goods, but even credit unions themselves were fiscally impacted.

Inman’s Community First Credit Union remodeled or refurbished branches in 2019 and noticed after the trade war took effect that vendors began limiting quotes to 30 days instead of the typical 60 to 90 days

“I think that’s how businesses were starting to respond: getting tighter on their bids and proposals,” he says.

Everyone agrees the manufacturing sector has suffered the most from the trade war. Eisel says manufacturing numbers across the country have been “horrible” since the trade war ramped up in mid-2019 and both shipments and new orders fell dramatically. Firms also were reporting a decline in production, backlogged orders and weakening local business conditions. “Most companies are not going to invest in people and equipment while the trade war continues,” Eisel says. “Supply chains have been disrupted, and this has had a profound effect on confidence in the business community.”

Stimulus Suggestions

Eisel believes resolving the trade conflict would go a long way toward rebuilding business confidence and future investments. Something coming out of Washington in the form of fiscal stimulus — like the 2018 tax cut that provided a short-lived boost — could help the country’s economy stay afloat. “Significant dollars are going to farmers to help support them right now as they struggle with poor weather and trade challenges,” he says, but broader measures are needed to help the whole of America.

“Most folks are looking at the Fed to do something with regard to interest rates, but rates are already heading back to record low levels,” Eisel says. “While this change in direction in monetary policy is welcomed, there still needs to be support from the fiscal side of the house, which doesn’t appear close to happening.”

Interest rates also play a major role in credit unions’ bottom lines. One Nevada’s Parrish says: “The odds currently are not with a rising-rate scenario [from the Federal Reserve], but a slightly rising-rate environment might be the most desirable for a majority of our credit unions looking for a bit of spread relief. A declining-rate scenario will certainly help bolster loan volumes, but with funding costs still sound asleep on the floor, the continued squeeze on net interest spread should be widely anticipated.”

Catalyst’s Shipman believes a global economic slowdown and the increased impact of trade tariffs will continue to affect the U.S. economy. “Conversely, a tariff reduction could have a stimulative effect on potentially extending the current U.S. economic cycle.”

Lower interest rates could help prop up a sagging economy, Inman says, but the lower rates also would reduce credit unions’ lending margins.

Politics and Presidential Elections

Inman believes a major barrier to continuing economic growth in 2020 is the current state of affairs in Washington, D.C., in which the standoff between a Democrat-controlled House of Representatives and Republican-controlled Senate creates legislative impasses.

“If the government could work together and do something, that would have the greatest impact on consumer sentiment,” he says.

A sudden course change in today’s highly partisan, politically charged environment, however, seems unlikely.

Presidential elections historically impact economic decisions in two ways, Shipman says. If the economy is doing well around the time of the election, voters tend to reelect the incumbent; if economic conditions worsen, the challenger tends to gain more votes. Secondly, stock market returns are generally higher in a president’s third and fourth years in office.

“There is also an element of uncertainty that comes with presidential elections,” he explains. “Things such as tax modifications, regulation adjustments and fiscal policy can have a profound impact on the economy beginning as soon as six months into the presidential term. This will have an impact on the economy, potentially in the election year and for at least two years to follow.”

Student Loan Debt’s Economic Impact

As of Sept. 30, 2019, 44 million student loan borrowers owed a total of $1.46 trillion, with the average loan being $28,650 and 11 percent of them delinquent, according to the Federal Reserve and the Institute for College Access and Success.

“I don’t think there is any question that the student debt overhang is crowding out other types of credit, particularly housing,” Long says. “It remains a big reason why young borrowers are not even bothering to apply for mortgage loans.”

“This is one of my concerns for the future,” Inman admits. In addition to being unable to afford to purchase a home, he says, these borrowers — including a significant number who borrowed for college and then failed to earn a degree — also delay auto purchases, having a family or saving enough for retirement.

Student loan debt will be a challenge for the foreseeable future. “High student loan debt levels will continue to restrain spending for the younger generation and even impact saving and retirement for the older generation, who continue to have this debt as well,” Eisel predicts.

Advice for Tumultuous Times Ahead

In the coming year, it’s important for credit union CEOs to continue to focus on the growth of their overall loan portfolios. “But how do you position that if you’re not in an area with fertile growth, as we here in northeastern Florida have? With good, quality underwriting, as well as managing the business in a way that you can manage that interest margin,” Inman advises.

He also recommends paying close attention to the credit union’s overall branding as a trusted financial resource with expanded member options, such as mobile banking apps and virtual payment options.

Parrish believes most credit unions appear to have built up capital since the Great Recession, leaving them in better shape from both capital and liquidity standpoints. That kind of extended success, though, can lead to becoming a bit lazy when it comes to expense control, he warns.

“If you can quickly reduce expenses and combine that ability with the solid cushion of capital and liquidity, you’ll have a pretty good defense set up for the next downturn,” Parrish says. “Also, remind members that you managed to survive the last extreme downturn — and then show them that you’re in much better shape now to take on the next one.”

Anne Saita is a business and technology freelance writer and past contributor to The NAFCU Journal.

This article was published in the January-February 2020 edition of The NAFCU Journal magazine. Want to receive The NAFCU Journal in your inbox? Update your email preferences.

Related Content