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Economists at Catalyst Corporate Forum: No Recession Ahead
Tuesday, October 14, 2014 6:35 AM

During Catalyst Corporate Federal Credit Union's 37th Annual Economic Forum, six economists sang a happy, harmonious refrain: barring unforeseen catastrophe, the United States economy is not in danger of returning to recessionary conditions.

With voices chiming in from several sectors, presenters told the nearly 300 credit union leaders attending the annual event that the U.S. economy will continue its gradual, upward climb.

Steven Rick, chief economist for CUNA Mutual Group, provided the crowd of 300 with a laundry list of variables substantiating economic recovery, including improvements to the housing market and home prices, manufacturing gains of 18 percent, rising consumption of health care by baby boomers, the "end of deleveraging" that followed 2007 record household debt, and the declining unemployment rate.

"With the latest unemployment figure of 5.9 percent, we are getting very close to the long-run target of 5 percent," said Rick. "Anything below that will create pressure on wages." He also explained that the underemployment rate of 12 percent is still too high relative to the 9 percent target, but that the U.S. is seeing more high quality jobs. In 2014, 75 percent of jobs added were considered "high quality," versus just 50 percent in 2013.

Rick also addressed the positive impact of healthier household financials, in that consumers are now demanding more goods and services, along with the loans necessary to acquire them. Credit unions' net charge-off rates have declined back to a pre-recession level of around 0.5 percent after climbing to 1.20 percent at the height of the downturn, he explained. "Financial institutions now can loosen their lending standards a bit, allowing consumers to finance new purchases."

Nevertheless, Rick stated that inflation is not on the horizon, which means the Fed likely will raise interest rates slowly—at approximately 1.25 percent per year for the next three years­­—a departure from previous post-recession hikes when rates were increased by 2 or 3 percent in a one- or two-year period. "This is good for credit unions, because rates rising too fast would have a negative impact on the cost of funds relative to earnings on assets," said Rick.

In general, interest rates will remain low due to simple supply and demand, he said. Slow overall growth and a post-debt crisis borrowing aversion are among the variables contributing to low demand, while the money supply is boosted by factors such as increased trade dollars, the "safe harbor" influx of investments from less stable countries, and rising income equality (as wealthier individuals have more excess income that they have no need to spend).

Credit unions also are benefiting from an unlikely source: the Dodd-Frank Act's Durbin Amendment, which limited interchange income for larger financial institutions. "Banks making less interchange income increased their fees, sending consumers to credit unions," said Rick. "Remember Bank Transfer Day?" Membership and the pace of growth are at an all-time high.

Volume of nearly every type of loan that credit unions make is on the rise, with secondary mortgages the only exception, according to Rick. Credit unions are well on their way to returning to 1 percent ROA, the gold standard that has not been achieved since 2003. And even though much of the growth is concentrated among the largest credit unions, the smaller ones are beginning to see meaningful improvements as well.

"Next year will be very good for credit unions," said Rick, as he forecast loan growth of nearly 10 percent for 2014, the fastest pace since 2007. Credit unions will reap the benefit of pent-up member demand for cars, furniture, and appliances over the next two years, while credit quality continues to improve and membership grows. "Ultimately, capital ratios will approach the record level of 11.5 percent set in 2006."