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Utah Credit Union Association Volunteers Conference Friday, October 21, 2011 The Economy and Its Impact on Credit Unions Mike Schenk Vice President, Economics & Statistics Credit Union National Association Telephone: 608-231-4228 Facsimile: 608-231-4924 E-Mail: email@example.com
Where do we go from here? • “Normal” recovery? • Sustainable but very slow recovery? • Double-dip recession? • Depression?
Market Interest Rates 1960 to 2011 • Gobs of stimulus • Q: What causes recessions? A: Historically recessions have been caused by Fed action to slow a fast-growing economy. The resulting inverted yield curves foretell downturns with a high degree of accuracy. In modern times the US economy has not gone into recession with an accommodative Fed (i.e., a steeply-sloped yield curve.) • 4.6% drop in installment credit in August but prior to that ten consecutive months of increases. YOY growth in August was 2% & five consecutive months of YOY increases.
Gross Domestic ProductPercent Changes - $2005. Source: BEA • LT average ~3%; Max. sustainable ~ 3.5%. Recession: two consecutive quarters of contraction. • Obvious 1st quarter soft patch related to Japan, Arab Spring, bad weather, but a marginal increase in 2nd quarter & clear indications of more growth in the 2nd half. • Index of Leading Economic Indicators increased 0.3% in August to 116.2 (2004=100) – pointing to an expanding economy in the coming months.
Monthly increases in 13 of past 14 months • Stock market = 3% weight • Stocks are a lousy predictor of economic activity
US Employment ChangesThousands - Source: BLS • Private sector jobs +17,000 in September (19th consecutive monthly increase). • New claims for unemployment insurance decreased to 404,000 in the week of Oct. 8th (below the April high of nearly 480,000 but claims above 400,000 are not consistent with labor market recovery) • Average hours worked up 2% compared to last year. Average hourly earnings (cash earnings excluding fringe benefits) were up 0.7% in July & are up 2.3% vs. year-ago.
Retail Sales GrowthSource: BEA • Monthly gains in 19 of past 22 months. • YOY gains in 22 consecutive months. • Prospect of more growth as auto dealers build inventories – a “virtuous cycle” but confidence is key. • Although affordability is high, pending home sales fell in July & new home sales have declined for three consecutive months. Sales stimulate demand for other goods & services.
US Unleaded Gasoline PricesSource: Oil Price Information Service • Gasoline + 28% in wake of Arab Spring (Jan to May) but down 13% (51 cents) from late-April peak. Rule of thumb: each 1 cent decrease in price puts $1 billion in consumer’s pockets. • WTI crude increased 27% from year-end 2010 to 4/29/11 but has declined by 25% since – now at $86. Rule of thumb (Energy Information Agency): sustained 10% increase = 0.05% to 0.1% decline in GDP. • Recent oil price declines, conclusion of summer driving season and generally soft demand signal additional price declines. Futures markets confirm this view.
Growth in Corporate ProfitsPercent Changes - Source: BEA • 10 consecutive quarterly increases; 8 consecutive YOY increases. • Revenues up an average of 9%. Revenues outpaced nominal GDP growth in each of the past 7 qtrs. All ten S&P 500 sectors recorded revenue growth. • Corporate balance sheets are strong – big cash reserves – poised to respond to any obvious uptick in consumer demand.
Business Investment in Equipment & SoftwarePercent Changes - Source: BEA • 8 consecutive quarterly increases; 6 consecutive YOY increases. • Accounted for 40% of GDP growth in past year – 32% in Q2. • Good near-term indicator of productivity growth trends. Remember: GDP growth = labor force growth + productivity growth.) • Fairly good longer-term indicator of labor force growth.
ISM Purchasing Managers IndexSource: ISM • Readings above 50 represent expansion in manufacturing - 26 consecutive months of expansion • The current reading (51.6) is consistent with an economy that is expanding at a 3.2% pace according to the ISM. • 12 of 18 manufacturing sectors report growth with consistent reports of high demand for export goods.
US ExportsPercent Changes - Source: BEA • 8 consecutive quarterly increases; 6 consecutive YOY increases. • Accounted for nearly two-thirds of GDP growth in past year & in Q2. • Dollar has fallen • Strong exports fueling strong manufacturing sector.
Overall, 2.9 million US homes received foreclosure filings in 2010 – up 2% compared to 2009. This translates to a record 2.3% of US homes receiving foreclosure filings in 2010 & that level is expected to be little-changed in 2011. • Elevated vacant homes on market & prospect of additional foreclosure activity virtually guarantees continued price pressure. An additional 2-2.5 million homes are in “shadow inventory” – owned by banks & CUs but held off market.
The current 9.1% unemployment rate masks substantial underlying problems. While 14 million are now unemployed there are an additional 9 million underemployed (those wanting but failing to find full-time employment) and roughly 1 million who have dropped out of the labor force. The U-6 unemployment rate – adjusting the data for these underemployed and drop-outs - is approximately 16% today. • Duration of unemployment is elevated and near modern-day highs. Over six million have been unemployed for one-half year or more.
Household debt has declined markedly, in part due to deleveraging (pay-downs) and in part due to defaults. However, debt-to-income ratios remain elevated by historical standards. • Near-record low interest rates and massive refinancings have translated to lower debt payment burdens. This means that even though debt-to-income ratios are elevated, debt payment burdens are now very close to all-time lows.
The Fed is “pushing on a string” and the economy is in a classic liquidity trap. The banking system is flooded with excess reserves. But consumers, though more able to borrow today compared to the recent past, reflect a strong unwillingness to do so. • Household net worth remains about $8 billion lower than at the start of the downturn – indicating that deleveraging and increases in savings will continue to outpace growth in borrowing activity. $41 Billion
Economic Outlook Soft patch - very slow growth to follow Inflation worries take a back seat Unemployment will decline – but very slowly Fed funds flat Very little change in long rates