"There will not be a recession in the U.S. in the near future!" Mike Schenk, deputy chief advocacy officer and chief economist at CUNA

WASHINGTON—There will not be a recession in the U.S. in the near future, according to a CUNA economist, who is citing two reasons for the forecast: the inverted yield curve this time is not a sign of a downturn, and the economy will continue to expand.

Mike Schenk, deputy chief advocacy officer and chief economist at CUNA, said the uncertainty and volatility in the economy brought about by the trade war with China and debate around what the inverted yield curve might mean, as long-term Treasury yields drop below those of shorter-term T-bills.

“When the yield curve inverts, the U.S. generally heads toward a recession. It is typically a very accurate predictor of a recession,” said Schenk. “But this time we don't think that's going to happen for variety of reasons.”

Not Typical Inversion

A key reason for CUNA’s stance, said Schenk, is that what has triggered the inverted yield curve this time is not what typically causes the rate imbalance.

“If you look back, historically there's been one or two instances when the yield curve inverted and no recession has followed,” explained Schenk.

One of those instances was in 1998, he said.

“What happened was the yield curve inverted because there was a flight to safety, so what we saw was a huge increase in demand for Treasury securities that caused treasury prices to go up and mathematically the yields to go down and that's how the yield curve inverted,” he said. “The exact same thing happened this time—the yield curve did not invert because the Federal Reserve has been overly aggressive at increasing rates. The rates are simply inverted because there was consternation in bond markets, and long yields went down.”

Improvements, Not Deterioration

And with 70% of the economy driven by consumers, that bodes well for the near future, Schenk said.

“When we look to the consumer sector, generally we see not only a healthy consumer sector but a consumer sector that reflects financial health that's improving, not deteriorating,” explained Schenk. “That says to us that we're probably in good shape overall and we do expect to see expansion continue.”

Schenk said CUNA expects the economy to continue to grow at a slower “but healthy” rate.
“In that context, our baseline forecast calls for the credit union industry to perform quite well over the next 12 to 18 months,” he said. “This is something that is more likely than not. We're definitely past the peak of the credit cycle, that's clear. We expect credit union loan growth to continue to come in at healthy, but lower levels; earnings to come in at healthy levels, and asset quality to maintain its relatively high position at the moment.”