CUNA: Economic outlook OK, but not what it should be

SEWARD — The recession is over, but that doesn’t mean everything is back to normal yet. Economists with the Credit Union National Association say the national outlook is a slow recovery, and this is something credit unions need to be aware of when lending.

Mike Schenk, CUNA vice president of economics and statistics, addressed the Alaska Credit Union League about the slow recovery during the league’s annual meeting in May.

“I can tell you that we’re now growing at fairly healthy rates but certainly not rates that are reflective of a normal economic recovery,” he said.

Economic growth is rising and unemployment is falling. However, the rates are not what they should be at this time after a recession, Schenk said. Even with good news, albeit slow, economic concerns can still impact how credit unions lend money.

He said there are positive economic turns that credit unions can take advantage of, like improving labor markets and consumer confidence. Inflation is currently in check for the moist part, too.

Schenk said the main goals are to maximize economic growth, maximize employment and minimize inflation. While these goals seem basic, there could be more complications in reality.

“The problem is if you look at it very closely, you quickly come to the realization that these goals compete against one another,” Schenk said.

He gave an example of how boosting employment “by definition” almost always translates to increases in inflation.

Last year had an optimistic start for gross domestic product but dropped quickly in the first quarter to 0.4 percent. It steadily rose to 3 percent by the fourth quarter.

The first quarter of 2012 was also disappointing at 2.2 percent, and has since been revised down to 1.9 percent. Schenk said most economists hoped it would be closer to 2.5 percent. A bright spot in that quarter, however, is that government decreased spending by 3 percent.

“So that result, 2.2 percent growth actually occurred in the face of a pullback on the part of the government,” he said.

One concern is that investment spending declined by 9 percent. However, consumer spending went up 3 percent. Consumer spending is vital because if accounts for the majority of economic activity through CUNA estimates. Exports were up 5 percent while imports went up 4 percent. Growing domestic manufacturing is key to reducing the trade deficit.

“The bottom line is that we achieved this growth with very little price increase,” he said.

He said the slight price increase was still well in the comfort zone of the Federal Reserve. However, the rates could still be growing faster and are not what should be seen in a normal economic recovery, he said.

He pointed out that the labor market still has a long way to go in improvement even as unemployment is on its way down.

The current 8.2 percent unemployment rate, though, is not reflective of the actual amount of those not working. Adjusting for those who are underemployed or have left the job market out of discouragement brings the rate closer to 14.5 percent.

Schenk said the goal nationally is to have a 5 percent to 6 percent unemployment rate. The rate was in this range in December 2007. In October 2009 that rate rose to 10.1 percent nationally. It has dropped to 8.2 percent by May, but the U.S. economy added just 69,000 jobs last month.

Schenk said there has been 25 consecutive months of private sector job gains with 2.5 million new jobs since the beginning of last year. He said this combined with normal unemployment insurance claims indicate that further market improvements could be on the horizon.

He said 150,000 new jobs added per month are needed for a healthy recovery and to bring that unemployment rate down. Recent data indicates the 115,000 new jobs currently being added each month doesn’t cover it.

“The payoff for that of course is that when the employment situation is improving, when labor markets are improving, people’s incomes tend to go up and they tend to feel a whole lot better about the future,” he said.

Consumer confidence started high in 2011. It had a fairly sharp falloff at the end of the summer but went back on the rise around November before dropping again in May. Schenk cited high oil prices, the Japan tsunami, and the Standard & Poor’s downgrade of the U.S. credit rating last August all contributed to loss of consumer confidence.

Some more factors that have the CUNA economists concerned is the uncertainty surrounding Europe’s effect on exports, Congress’s handling of the budget and several tax cuts that could disappear. These include payroll tax cuts and extended unemployment benefits. Schenk said it’s uncertain but could mean a substantial hit to economic growth.

In addition to these concerns, the household sector has its own set of concerns in that the debt burden is falling but is still very high, and the housing market is bouncing along the bottom and coming up out of that looks like it will be long and slow.

“There doesn’t really seem to be a prospect anytime soon of what we would normally see in terms of a recovery housing that looks anything like a normal recovery housing coming out of a recession,” Schenk said.

One possible way to achieve better economics is through monetary policy and controlling the money supply through Federal Reserve activities by selling securities to try to target interest rates.

“If the economy’s growing slowly, we essentially try to lower those interest rate targets and make it more affordable for people to borrow money,” he said.

Overall, the recovery looks to be a gradual one. Schenk said that while this is currently a soft patch, growth will continue into next year as unemployment also declines very slowly. Inflation is expected to remain flat.

This could mean slow loan growth for the credit unions. This will present many challenges, especially for the smaller credit unions.

Member business loans have been among the highest loans in terms of growth. Other positive loan growth was from first mortgages, credit cards and used automobiles. New automobiles, on the other hand, declined. So did home equity loans and second mortgages.

Alaska’s credit unions have still done better than most. Schenk said Alaskan credit unions have grown slightly over the last three years while those in the rest of the country remained relatively even.

Jonathan Grass can be reached at jonathan.grass@alaskajournal.com.