By Sheryl S. Jackson

Noted management consultant and author, Peter Drucker, once described predicting the future as “trying to drive down a country road at night with no lights while looking out the back window.”

Even with this warning in mind, every business leader knows that you have to keep looking ahead to see how economic, social, local and global issues may affect business. Keeping the need to plan for the future in mind, along with Drucker’s warning that it is difficult to predict or control continual change, credit union leaders are looking at the U.S. economy and how it will affect credit unions and their members in 2022.

Inflation is top of mind for many people, but the characterization of inflation seen in late 2021 as transitory can be misleading, said Curt Long, chief economist and vice president of research for NAFCU. “Transitory means different things to different people, but I believe high inflation will last longer than many people believe.”

“There are two camps of thought about inflation, and I am more in the camp that inflation is NOT transitory, and we will see higher inflation going forward, even if we get back to a more normal economic environment, which is expected in 2022,” said Fred Eisel, chief investment officer for Vizo Financial Corporate Credit Union. Wages and supply cost increases have resulted in price increases by consumer goods companies, he pointed out. “I don’t think you see these prices come down even if raw materials get cheaper, as wages and other expenses remain high to produce a number of these goods.”

Wage pressures, especially with lower-paid staff, have finally taken hold with the fight for $15 per hour and higher base hourly rates, and in the financial space, Bank of America and Wells Fargo have announced their minimum pay will be $20 per hour or $40,000 a year, said Eisel. “I have spoken to a number of credit unions who are seeing this wage pressure in their own markets and forcing them to try to remain competitive with wages, specifically for their frontline staff.”

Employment Costs and Challenges

Competition for employees is a real concern for credit unions. According to a 2021 NAFCU survey, 55% of respondents reported that attracting and retaining skilled staff is a significant challenge. This is a notable increase over 2020 survey results in which 36.4% named attracting and retaining staff as a significant challenge.

Although it is hard to determine data from all sources, it appears the concern about COVID and lack of daycare for working mothers are the biggest obstacles to re-entry into the workplace right now, said Eisel. “The Atlanta Fed did a research piece on workers with young children during the pandemic and found women with children under six, who made up 10% of the workforce prior to the pandemic, account for almost a quarter of the workers missing from employment rolls.” It appears from the research, daycare closings and subsequent very slow re-openings are the major factor holding back employment for this cohort, rather than school closures, he said. “Other research suggests around 800,000 workers aged 55 years and older have left the workforce, with the major factors including continued concerns over the pandemic, childcare issues and folks deciding they are ready for retirement.”

Another issue related to returning to a normal workplace is the comfort employees developed while working from home. “We’ve had a bit of a challenge calling our folks back from ‘Zoomland,’” says Paul Parrish, CEO of One Nevada Credit Union. “Some employees were thrilled to be able to return from the work-from-home schedule, while others had grown kind of fond of it.” There has been a bit of turnover as a result of calling employees back into the branches and offices, he said.

The combination of employees wanting to work remotely, increased wage demands and competition for qualified employees will affect credit unions in the coming year, said Parrish. He does expect compensation and benefits costs to increase. “Not all of this is being caused by evolving demands of the available labor pool,” he said. “We now have close to 80% of our members actively using our remote and mobile products for their everyday, routine transactions, which means our branches become technical service and financial advice centers instead of manual transaction factories. As a result, we’re moving toward fewer but smarter and better-paid member-facing employees to ensure more valuable employee encounters for our members.”

Housing and Auto Trends

Housing costs, in terms of home purchases as well as rents, will also drive inflation into mid-2022, says Long. “This might be more of an issue in some regions than in others as the migration of people to suburbs during the pandemic and work-at-home situations settles,” he says. The combination of businesses relocating to other states as well as individuals relocating to suburbs or to lower-cost states created unusual price increases in many areas, he points out.

As housing forbearance programs come to an end, Parrish does not see much impact for his credit union. “Our portfolio has continued to bump along without much impact, and it looks like that will be the case, for the most part, in other regions of the country,” he said. “As such, we’re not expecting any impactful amount of foreclosure activity.”

There is likely to be a noticeable difference for auto loan volume. “Auto loans are an important part of the overall loan portfolio for credit unions and there is not a lot of good news about future new auto purchases,” says Long. “Domestic manufacturing is down 30%, there’s a shortage of semiconductors used in auto systems, and supply chain issues are slowing delivery of materials.” As new cars have become scarcer, the sale of used cars has doubled, which is some good news, he adds. “This will resolve but we won’t see any light at the end of the tunnel until later in 2022.”

“We’ve seen a significant impact in our area — it’s kind of eerie passing by the various auto malls here and seeing dealerships with almost no inventory,” said Parrish. “Our auto loan volume is off by about 25%, and competition for what deals are out there has been pretty stiff.”

One thing to keep in mind: new and used auto pricing has reached record levels, as new cars are selling at sticker and some dealers are now adding on an additional fee, said Eisel. “Cars are an asset that depreciates in value, so as the auto sector corrects itself into next year, the valuation of these autos will most likely trend back to mean, and it may be quick.” This is something to be aware of as credit unions look at LTV percentages in their loan portfolio, he warned.

Interest Rates

“Federal Reserve officials are split down the middle on predictions for the Fed to raise interest rates, with some saying it will happen in 2022 and others saying not until 2023,” says Long. “Inflation should remain somewhat elevated, but it will still take some time to get back to full employment. I believe we will probably see a rate hike in the fourth quarter of 2022.”

“If the Fed does increase rates slightly next year, and right now, the futures market is pricing in 2.5 rate increases, this should benefit credit unions,” said Eisel. Spreads have been incredibly tight throughout this pandemic, so an increase in overnight rates will provide much needed room for margin expansion as cash and other short-term assets would reprice higher. “Most likely, credit union deposit accounts would lag this increase, providing some increased margins, and any investments or loans that are variable rate based on Prime or another index will adjust, benefitting the credit union.” Credit unions do need to model various rate scenarios and yield curve shapes to determine the impact to their balance sheet in the years ahead to evaluate the effect of higher yield loans or funding cost increases, he suggested.

Recession Not Likely

“I am not in the camp that believes we are heading to a recession, even though growth will slow in early 2022,” said Eisel. “The Bloomberg forecast right now is for economic growth to be around 4% in 2022. In 2023, economic growth is expected to head closer to 2.4%.” While this is slower, it’s also a more normal level of growth, he pointed out. “Economic growth of around 2–3% is normal, in fact, it averaged 2.2% from 2010 to the end of 2019, right before the pandemic year.”

Long agreed that there is a low likelihood for a recession and that the release of pent-up demand and return to normalcy after the pandemic will spur a stronger economy. “The end of 2021 we were still on a bit of a hold on the economy but 2022 will see more people returning to work, and some of the supply issues will sort themselves out,” he says. “We will see a big difference between the first and second halves of 2022, with us seeing a more recognizable economy in the second half.”

Looking Forward

When asked to give advice for credit union leaders as 2022 begins, Parrish said, “Capital, liquidity and task optimization will be vital to operating in an increasingly uncertain environment. If the economy does head south, capital will help us absorb whatever shocks might come our way. If rates take off on us, liquidity will certainly be useful on that ride up. And as technology remains front and center in terms of meeting member service expectations, we’ll need to focus on redirecting any resulting available resources toward more productive endeavors and better service.”