Is a Recession Already Underway?

The depth and length of the recession depends on the coronavirus and assumptions there will be, among other things, no natural disasters.

The recession that seemed a distant possibility a few weeks ago is now upon us, according to CUNA economists.

A little more than a month ago, CUNA was predicting U.S. gross domestic product would rise 1.8% this year. But in the wake of widespread stay-at-home orders and shuttering of many businesses to contain the coronavirus, the CUNA Economic and Credit Union Forecast released this week predicted the U.S. economy will shrink 2.25% this year.

CUNA economist Jordan van Rijn said Thursday the forecast appears optimistic in the wake of Thursday’s report of a massive wave of 3.3 million unemployment claims last week.

The published forecast anticipated as many as five million people being out of work this year, and the unemployment rate rising to 6.5% by the third quarter.

“That’s going to be an underestimate,” van Rijn said. “With the 3.3 million jobs lost in the last week alone, the unemployment rate is probably already about 4.5% to 5%.”

On Friday, the University of Michigan’s Surveys of Consumers reported its fourth-largest drop in consumer sentiment in nearly 50 years. The 11.9-point drop in its Consumer Sentiment index was only slightly smaller than its largest drop: the 12.7-point fall in response to the escalating financial crisis in October 2008.

University of Michigan economist Richard Curtin said confidence appears headed for an even larger fall in April based on the trend from late March.

“Stabilizing confidence at its month’s end level will be difficult given surging unemployment and falling household incomes. The extent of additional declines in April will depend on the success in curtailing the spread of the virus and how quickly households receive funds to relieve their financial hardships.

The CUNA forecast, completed March 24, preceded those reports. For credit unions, the forecast predicted:

Net income for the 12 months ending Dec. 31, 2020 is likely to fall to 0.50% of average assets, or perhaps lower. ROA was 0.93% in 2019, and the forecast posted in February predicted 0.90% this year.
Loans will grow 3.5% this year, bottoming out at 0.5% in the first and second quarters. That’s down from 6.5% in 2019 and CUNA’s previous prediction of 5.5% for 2020.
Loan quality will deteriorate, but not as badly as in the Great Recession. By the end of the year, delinquencies will rise to 1.00% and the net charge-off rate to 0.75%.

Delinquencies were 0.70% at the end of 2019, and CUNA previously predicted they would be 0.75% by the end of 2020. The net charge-off rate was 0.56% at the end of 2019, and was predicted to rise to 0.60% by the end of 2020.

In the recession of 2007-2009, delinquencies peaked at 1.8% and net charge-off rates at 1.2%.

“At this point, we don’t quite think things are going to get quite that bad, but it’s very possible,” van Rijn said.

Van Rijn said he figures the current recession began only a week or so ago, as markets plummeted and the World Health Organization declared the coronavirus a pandemic.

Because January and February had been relatively strong months, real GDP will probably only fall at an annualized 1% rate in the first quarter, but a walloping 12% drop in the second quarter.

From there, CUNA said it now expects the economy to rise 1% in the third quarter and 3% in the fourth. But those projections are based on some optimistic assumptions:

The coronavirus’ spread is slowed by social distancing and other measures, with the COVID-19 pandemic peaking in the second quarter, trailing off in May or June, and not returning to any significant degree later in the year.
The path of the pandemic is “maybe not quite as bad as Italy, but certainly not as good as South Korea.”
Congress and the Federal Reserve will respond aggressively with fiscal and monetary policy, “which they’ve basically already done.”
Lastly, “We also have to assume nothing else in the economy goes wrong: No other natural disasters, wars or things like that,” he said.

“There’s a tremendous degree of uncertainty,” he said. “It could be the virus comes back in the summer or the fall. That would certainly throw things off track. Or it could be that we need to have shelter-in-place orders in effect longer than anyone predicted.”

For credit unions, predictions by CUNA and CUNA Mutual Group are amplified: Savings will grow much more quickly than lending and membership.

On one hand, that means loads of liquidity. On the other, it means many fewer members will have the appetite or ability to borrow.

The federal stimulus bill provides $1,200 per adult with extra amounts for children. Van Rijn said it is overall a good idea, “but it isn’t particularly well targeted.”

For one thing, some households will get $3,400 checks when both spouses are employed, while across town the same size family will also get $3,400 that will barely pay the mortgage for a couple months.

The first couple is likely to save the money, especially with signs of recession around them. The second couple will use the money for food, car loans, rent or a mortgage payment.

“For a lot of folks, $1,200 is not going to cover their rent or mortgage for one month, let alone two, three or four months,” he said.

And unlike past recessions, families are not going to be piling into cars to shop at the mall or wait in line for a table at a restaurant. They’re not going to buy tickets to a concert or a baseball game. They’re not going to renovate a kitchen.

“We don’t expect a lot of that money to go to discretionary spending,” he said. “We envision a very big spike in credit union deposits this year of 12%.”