Sheryl S. Jackson
Every year several members of the Credit Union Economics Group (CUEG) provide their forecast on the factors that might affect the U.S. economy in the upcoming year, and how those effects might impact credit unions. While previous years’ articles appeared in the January-February issue of The NAFCU Journal, this year’s article was delayed, allowing for extra time to see how some of 2020’s unpredictable events might carry over into 2021.
While these economic experts presented their opinions based on information available at the time of their April interviews, 2020 taught everyone to expect the unexpected. Specific social, environmental, legal, and financial changes that can affect segments of the economy may have taken place during the weeks between the interviews and the publication date. The following observations provide a snapshot of economic predictors in early spring and identify the key areas that credit union leaders can follow and evaluate for the remaining months of the year.
What do economic indicators suggest for 2021’s economy?
Fred Eisel, chief investment officer for Vizo Financial Corporate Credit Union: “Currently, a number of areas in the economy are showing strong growth as many states have been re-opening. The ISM manufacturing data came in at record levels in March with a reading of 64.7, the highest level since 1983. Retail sales soared in March by 9.8%, blowing away expectations. Economic growth in the second half of 2021 is projected to be quite strong as the economy reopens and consumers can begin to spend on services again.
For the most part, demand by the consumer is increasing, helped considerably by stimulus, but the concern for many economists is the on-going supply chain bottlenecks and how this increasing demand will impact pricing and inflation.”
Scott D. Knapp, CFA, chief market strategist, CUNA Mutual Group: “Uncertainty about the intermediate term is high. Does strong economic data indicate a breakout in growth that will produce higher inflation and interest rates? Or does it merely reflect a reversion to the mean that will make new inflation and rising interest rates temporary? Time will tell, and trillions of newly printed stimulus dollars make this question hard to answer with confidence.”
What specific sectors are showing growth?
Paul Parrish, CEO, One Nevada Credit Union: “Key sectors of particular interest to credit unions include Auto, Housing, and Consumer Spending:
Auto Sales, understandably, were down in 2020 but are expected to bounce back significantly in 2021. Prices are expected to remain high as production continues to lag sales.
Conversely, 2020 was a record year for the housing market as supply continued its struggle to meet demand. As a result, the average home price was up almost 10% for the year, and our industry’s mortgage volume was as strong as ever. Despite current lumber shortages, the gap between housing supply and demand is expected to diminish somewhat in 2021, which should put the brakes on appreciation a bit.
Consumer spending fell off the cliff during the middle two quarters of 2020. Significant signs of a comeback materialized during the fourth quarter, though, as pandemic-related news improved and the economy started to open back up. These improved consumer spending trends are expected to accelerate in 2021, augmented by stimulus payments.”
Are there sectors that stagnated or declined in 2020 that are showing signs of recovery?
Eisel: “Obviously, the service sector — hotel, airlines, cruise ships, restaurants and bars — took a massive hit when the economy shut down in March of last year. With the economy opening up and vaccination rates on the rise, these industries are slowly coming back online. Airlines are back to filling the middle seat due to higher demand, and restaurants are now starting to open, especially with warmer weather allowing outdoor dining. Hotels are seeing occupancy increase and traffic on the roads has increased due to people returning to the office and traveling for leisure. You can also see this when looking at the ISM Services index, which reached its highest level in March at 64.7. Any reading above 50 is a sign of expansion. Demand for services is once again increasing at a very fast pace and is expected to remain high in the near term, putting more pressure on supplies and prices.”
Knapp: “GDP growth near 7%, if it occurs as expected, will lift almost all boats. As such, most industries will operate in much more favorable conditions this year regardless of how they performed last year. Even so, some industries were disrupted by the pandemic to the point where substantial innovation is required to continue to compete in a permanently changed environment. Industries that aren’t up to the challenge will encounter headwinds to their long-term viability.”
How did relief programs affect different sectors — both initially and moving through 2021?
Parrish: “The overall impact of the Paycheck Protection Program (PPP) and the stimulus payouts is still foggy at best. The PPP temporarily helped businesses with their cash flow and meeting payroll, thereby reducing or forestalling job cuts, while the stimulus payments temporarily helped recipients with their personal financial issues. Planning and implementation of these programs were bumpy at best, but they did lessen employment losses and helped everyday Americans through the shut-downs. However, the cost/benefit of those government decisions will probably be debated for years to come.
Moving through 2021, the perceived necessity for this type of government support should diminish as the economy improves. Hopefully, we can say that the relief programs, at least, created a well-paved runway toward economic expansion.”
Knapp: “Pandemic conditions accelerated structural changes to the economy and financial system that started during the 2008 financial crisis. “Fiscatary policy” is now an entrenched feature of the economic landscape. Specifically, the Fed substantially increased its purchases of U.S. Treasury securities during the pandemic, thereby enabling creation of enormous deficits that financed fiscal stimulus programs.
Last year’s activation of the Fed’s section 13.3 authority also moved it beyond its traditional role as lender of last resort to banks to lender of first resort to Main Street businesses in close coordination with the U.S. Treasury — a program that ended in January. The Fed has also moved from facilitator of price discovery for credit through free markets to determination of the price of credit through asset purchase programs.
These actions have melded fiscal and monetary policies in ways that are inconsistent with their traditional independent roles. The fact that our current U.S. Treasury Secretary is a former chair of the U.S. Federal Reserve serves as anecdotal evidence that fiscatary policy is a thing. Only time will tell if this profound change has long-term implications for financial markets or the economy.”
What do these economic trends and indicators mean for credit union leaders?
Parrish: “Over the past six months, the jury was still out on whether industry asset quality would take a turn for the worse once the effect of stimulus payouts wore off and loan extensions started to expire. It appears at this point that improvements in employment and additional stimulus payments are helping to keep delinquency and loan losses in check. These trends come as welcome news, particularly while net worth ratios keep taking a ‘whoopin’ from the truckloads of deposits credit unions have experienced.
The anticipated red hot economy should be good news for credit unions. An increase in demand for consumer credit will generally follow increased economic activity. Also, rising rates, as long as the trend isn’t too steep or too sudden, will help mend some of the net interest income damage from over the past year. Asset yields should increase, and with the build-up of liquidity that most credit unions have experienced recently, some lag opportunities in liability pricing will be available. Also, it will be interesting to see how the mortgage market plays out over the next few years if rates continue to rise, yet demand remains strong. As such, credit unions will have to pay close attention to pricing over the coming periods.”
Eisel: “Last year presented credit union leaders with an unprecedented environment. It started with many credit unions closing branches, which pushed members to utilize the credit union’s electronic platforms — many for the first time. As the economy remained mostly shutdown, credit unions increased their allowance for loan loss, opening up skip-a-pay and forbearance programs, or increasing the availability and flexibility of these programs they already had in place to assist their members in need. When it became clear that the economy would not re-open quickly, credit unions saw slower loan growth as a longer-term concern and were forced to evaluate ways to invest excess liquidity into the markets. Unfortunately, demand for bonds has been at record levels in a market where interest rates were once again back to record low levels, similar to what we experienced during the financial crisis. After two more stimulus packages were introduced in December and then March 2021, deposit growth reached record levels for many credit unions, putting more pressure on the investment portfolio.
On the loan side, credit unions are still faced with anemic loan demand with regard to autos and credit cards, but mortgage lending has been at an all-time high for many. Record low interest rates and new work-from-home (WFH) plans by many companies has created unprecedented housing demand in many parts of the country. This has also created pressure on housing costs, with lumber prices at record highs and contractors difficult to schedule. Even so, credit union members continue to see value in the housing market so demand is still high and is expected to remain so as rates are projected to stay low well into 2022.
For credit unions, it is a balancing act to determine how much of this excess liquidity to put to work in the investment portfolio while trying to determine how sticky these funds might be moving forward. While loan demand may pick up in other parts of the balance sheet, members are using their excess funds to pay down debt and increase their rainy-day funds. Data shows delinquencies and charge-offs are trending lower as folks are repairing their personal balance sheet. While better loan performance is welcome for the credit union, projecting future loan growth will be difficult.
On the expense side, many credit unions refocused their efforts and budgets on enhancing the electronic delivery of their financial services as many of their members were forced to utilize these avenues during the lockdown in 2020. Credit unions are investing in more cybersecurity given more transactions are moving this way, and training will become more virtual. Credit unions are reviewing their travel and educational budgets in 2022 and realizing they can still find incredible training for their staff in a virtual way, providing more opportunities to more employees at a fraction of the cost and limiting employee downtime.”