GRAVEVINE, Texas–Credit unions should enjoy the next 15-18 months but also be preparing for a recession in 2020, according to one economist.
Dr. Elliott Eisenberg forecast the economic slowdown will come about as the result of a number of factors, and stressed that while the word “recession” conjures up the economic calamity of a decade ago, he foresees a recession that will be milder and will last for perhaps six to eight months.
What it means for credit unions, said Eisenberg in comments to CU Direct’s Drive 18 meeting here, is they should not lower underwriting standards and not extend terms. Eisenberg’s forecast is similar to what credit unions attending the recent CUNA Finance Council annual meeting heard from CUNA Mutual Economist Steve Rick, as CUToday.info reported here.
“For the next 15 months or so this economy should be very good; the best economy we’ve had since the recession,” said Eisenberg. “Through late 2019, 2020 things are going to be good. And then things will get dicier. Think about how to position yourself when the recession comes.”
‘What I Desperately Want to Tell You’
For now, Eisenberg, known for his animated delivery style, noted consumer spending, corporate investment and government spending are all up, which is producing the robust numbers.
“It’s unusual this late in a business cycle to see government spending going up,” he said. “The last time that happened was in 1986. It almost guarantees a strong, robust economy. Households are repairing their balance sheets and releveraging. We are borrowing differently now than we did 10 or 12 years ago. Mortgage debt is now not quite as big as it was at the peak. There is no housing bubble of any kind, although there are some problems. But student debt is going up like mushrooms after a frigging rain storm; it’s more than credit cards and automobiles. The problem is you incur these debts when you’re 25. But by and large the data is very good.”
All that said, Eisenberg throughout his comments stressed credit unions need to plan now for any slowdown.
“What I want desperately to tell you is don’t let up on your lending standards. You want to get market share, but don’t reduce your FICO requirements,” he said. “Loans that look good now are not going to look good in two to three years. I’m not saying we’re coming to the end of the world. But observe that interest rates are rising and total debt is going to consume more of our income to pay the bills. Keep in mind we are late in a business cycle. Delinquencies are staring to rise a bit. Things are starting to change. There is nothing to ring the bell about, nothing to say we’re in real trouble. But there are these indicators.”
Another thing to watch, he cautioned, is the high number of automobiles coming off lease that are pushing down residual values in the car market.
Enjoy Now, Pay Later
“The tax cuts are going to supercharge the economy, but only in the short run,” said Eisenberg. “Congress also borrowed $300 or $400 billion for spending. That adds a half-point to GDP. That’s why the next 15 months will be terrific. So, what’s the catch? In 2020, the fiscal stimulus we are having now becomes mildly contractionary. Interest rates are going to be higher, and this is going to raise the probability of pushing us into a recession.”
Eisenberg said President Trump’s tariffs on Europe and China will lead to retaliation that ultimately will reduce GDP by two-tenths of a point.”
Other points made by Eisenberg:
“We cannot fix the trade problem through trade policy. The trade deficit has nothing to do with trade, it has to do with savings and investments by households, businesses and government. If we spend too much and we don’t save, we have to import the money. We haven’t changed our behavior. The trade deficit is getting worse because the economy is getting stronger and we’re importing more. The problem with a tariff on metal is if you make metal, you win. But the losers are everyone who uses metal and buys it.”
“Shouldn’t we be able to grow faster than 2%? No. GDP only grows for two reasons: more people working, and there weren’t enough people born 15-18 years ago because fornication just is not as much fun as it used to be. The second reason is labor productivity growth isn’t all that good. So, our long-run GDP is roughly 2%; we’ll do better over next 15—18 months, and then it ends.”
“Labor markets are on the mend. They are so tight, it’s crazy. There is a catch and that is the only way we can get this growth is by driving the unemployment rate down. Because of the lack of fornication, our economy creates about one-million new workers per year, and we are coming up short on people. Last year the unemployment rate fell to 4.1%. Unemployment can’t fall below 3.5%. We’re going to run out of workers come 2020. The number of Americans looking for jobs has plummeted from seven million to one million. We are at full employment.”
“Wages are not going up so much. It’s not terrible, and one reason is demographics. The 2.6% annual wage growth jumps up to about 3.2% if you adjust for demographics due to Boomers, who were being paid more than new college graduates. And with the gig economy there are a lot of people who like working for themselves, even if they make less money.”
“The Fed is concerned that at some point unemployment gets so low inflation rates start to skyrocket. Central bankers are born to fear inflation. They never want to lower rates; just raise them. Inflation is starting to appear late in the business cycle. We are going to have sustained inflation, but it’s not going to be strong due to wages. We’re really close to the Fed’s target of 2%. But the Fed often over-reacts and drives us into the drink.”
The Direction of Rates
“Fed funds is currently at 1.625%. By end of the year the Fed will raise rates at least two more times, and we will be at 2.125% by year-end, with 10-year Treasury at 3.20%. By year-end 2018, Fed funds will be at 2.875% and the 10-year Treasury at 3.5%.”
“The real estate market is a mess; there is no other way to look at it. It’s beautiful on one hand, a wreck on the other. Builders can’t build entry level homes in any town in America and make money. So, homes are bigger now and more expensive. Bigger homes continue to get built, but we’re building half the number of homes we built in 2005. There is also no labor available, because no skilled tradesman and immigrants in U.S. illegally have left. Tariffs on lumber and steel have also driven up costs.
“Job growth is good, wage growth is good, but there’s no homes to buy,” continued Eisenberg, who was once economist for the National Association of Home Builders. “We’re underbuilt on homes by three to four million. But there is no bubble. There is no problem with the quality of borrowers. Even the bottom 10% are at 650 FICO. Banks and credit unions becoming much more thoughtful on how much to charge. But the lack of inventory is killing us. Prices are up by 6%, but volume is up by 1%. Mortgage applications have been pretty flat.”