CUNA: U.S. Is Likely to Bypass Recession

Economist says strong household spending is acting as a ‘firewall’ against recession.

By Jim DuPlessis |

Source: Shutterstock.

CUNA’s latest forecast backs away from predicting a recession, saying a strong jobs market and resilient household spending have tilted the odds in favor of a soft landing.

In an Economic Update video posted May 25, Senior Economist Dawit Kebede said CUNA economists still expect economic growth to slow this year and next, but they are more optimistic than in their January forecast.

Kebede said one reason is the strength of the job market. The other is the continued strength of household spending. “It’s acting like a firewall keeping the economy from recession.”

CUNA and the Mortgage Bankers Association had predicted last October that a mild recession would occur in early 2023, later pushing the start date to this year’s second half. MBA stuck with that forecast as recently as mid-May even as its monthly forecast was revised to show only two slight drops in GDP in the second and third quarters.

Dawit Kebede

CUNA too had stuck with its forecast into late May. In an article CUNA published two days before the video, Kebede is quoted as saying CUNA economists believe a recession is “more likely than not.”

NAFCU Chief Economist Curt Long has been more optimistic, saying in January the odds had improved for a “soft landing” after the U.S. Bureau of Labor Statistics reported the unemployment rate in December had fallen to 3.5% — it’s lowest in 50 years. It had risen to 3.7% by May.

Long was forecasting in January that the U.S. economy would grow 1.5% this year, down from 2.1% in 2022, but better than the 0.5% then forecast by CUNA and the Federal Open Market Committee.

CUNA is now forecasting the economy will grow 1% this year and 1.5% in 2024.

The biggest “key assumption” in CUNA’s forecast was that a debt ceiling deal would be reached allowing the U.S. to avoid defaulting on its debts and “avoid significant turmoil in financial markets, or worse.” President Joe Biden was able to sign such a deal about a week after Kebede’s video.

CUNA also revised its forecast for credit union results from those it made in January to show slower growth for savings, higher growth for loans and lower profitability.

“Although we expect no more Fed Funds rate increases, we also don’t expect the Fed to begin easing until next year. Continued high short-term interest rates will work against credit union net interest income and dampen deposit growth into early 2024,” CUNA’s forecast report said.

CUNA now expects savings to grow only 4% this year, down from its 6% forecast in January “following a disappointing first quarter for deposit growth” with growth of only 1.8%.

“This is troubling because historically almost 60% of annual savings growth happens in just the first quarter,” CUNA’s forecast report said.

Savings growth will be dragged down this year as households draw down excess savings to keep up with inflation, or shift savings outside the credit union system to banks or money market funds offering better rates.

“With our expectation that the Fed Funds rate will remain elevated for the full year, savings growth will remain weak, and the savings credit unions do attract and retain will be costly,” it said.

Loan balances are expected to grow faster. CUNA had previously forecast a 7% increase in lending this year, but now it is forecasting 7.5% this year and 8% in 2024.

“In nominal terms this is close to long-run average growth, but considering inflation it represents below normal real growth,” the report said. “Headwinds to loan growth will be: the softening economy and high interest rates reducing demand, and tight liquidity at many credit unions restricting supply.”

As savings slow and lending accelerates, credit unions will feel the pinch in liquidity. The year-end loan-to-savings ratio projection, which had been 82.8%, is now forecast at 84.4%.

CUNA also expects the 60-day-plus loan delinquency rate to rise to 0.75% by December, instead of 0.70%, and credit unions’ return on average assets to fall to 0.55% this year, rather than its previous 0.60% forecast.

Delinquency rates have risen sharply this year, but it remains unclear whether they are in troubling territory or just returning to typical pre-pandemic levels.

CUNA was significantly overstating delinquencies as recently as June 5 when its latest Monthly Credit Union Estimates report showed delinquency rates of 0.65% for March and 0.72% for April. NCUA data released Thursday showed the delinquency rate was only 0.53% in March.

CUNA also underestimated ROA. For example, its forecast for 2022 ROA was 0.70% in April and 0.75% in October. The final number from NCUA was 0.89%.

Jim DuPlessis