Economic and Lending Trends Webcast Recap: GDP Growth is Slowing, But No Recession In Sight
The U.S. economy posted huge growth numbers in 2018. Conditions have cooled a bit in 2019, but despite numerous predictions of a pending recession in recent weeks, there are signs pointing to continued economic growth, for at least the next 12 months.
That was the prediction from Dr. Elliot Eisenberg, nationally acclaimed economist, who spoke during CU Direct’s recent Q3 Economic & Lending Trends webcast. Eisenberg was quite adamant about batting away recent recession hype. He noted GDP, (Gross Domestic Product), is a measure of all the goods and services the United States is producing. The definition of a “recession” is at least two consecutive quarters of negative GDP growth.
The case for continued growth
“It [GDP] is growing,” Eisenberg said. “Growth has slowed in recent quarters, but it is still growing.”
Among the factors Eisenberg cited to support his point:
• Overall leading economic indicators across the country look good.
• Unemployment is maintaining at historically low levels.
• The University of Michigan Consumer Expectations Index has been “sagging” after peaking at 100 last year, but the number is still above 90. “That’s good,” Eisenberg assessed. “As long as it remains above 83 or so.”
• Small business confidence remains strong – above the long-term average of 98. Again, off slightly from peaks in 2018, but “still good.”
According to Eisenberg, 2018 had “spectacular” growth due to tax cuts. Growth in 2019 will not be as strong, but, he reiterated, “That is not a recession.”
“There is no recession now, despite the yield curve inversion,” he said, referring to yields on long-term bonds recently falling below the yields on short-term bonds, a phenomenon that in the past has been a signal of a future recession. “I think the next recession, when it happens, will be similar to the 1990 recession – very mild. I am not on recession watch in the next nine months or even 12 months.
The Federal Funds Rate is 1.875%. Eisenberg expects the Federal Reserve Board to make one more rate cut this year, then possibly one more next year, but at that point he believes the Fed will pause.
“If we hit a recession, rates will be lowered immediately, probably to zero,” he added.
Most economic numbers softening
The story of just about every aspect of the underlying factors of the economy was remarkably similar – the numbers were better last year compared to this year, but they’re still solid.
For example, despite “numerous stressors,” Eisenberg noted the stock market is doing “relatively well.” The numbers show American households are repairing their balance sheets, with trillions of dollars in net worth having been recovered. The downside: debt is rising. Eisenberg said households that are busy paying off debt aren’t buying new goods and services. Total debt is 6.9% higher than 2008 levels, but there is less high-interest revolving debt. Mortgage debt remains slightly below the 2008 peak.
Delinquencies remain low overall, but there has been a rise in credit card and student loan delinquencies. According to Eisenberg, delinquencies will rise soon because the numbers on auto loans and credit cards are getting worse, while the amount of past due student loan debt is “mushrooming.”
“Credit unions have a lot of auto loans,” he said. “Cars keep getting more expensive, so loan amounts are growing. Too many auto loans have been made to borrowers with low credit scores, especially 620 or below, and that is where the trouble will come from. Most of these have been made by non-bank lenders, such as auto finance companies, not banks or credit unions. But keep in mind that generally speaking this is not a good time to make auto loans to consumers with low FICO scores.”
Auto sales are trending down, as 2019 will be the first year since 2014 that 17 million units will not be sold. Recreational vehicle sales have been down each month in 2019 versus 2018. Meanwhile, interest rates on credit cards are at their highest levels in decades.
Residential construction of single family homes is still near recessionary lows. Eisenberg said the country needs more housing starts, especially entry level, affordable homes. Existing home sales are steady, in part because there is nothing to buy. Refinance activity is up, but could decline a bit in 2020.
Bottom line,“The consumer is doing gangbusters, which makes it very hard to have a recession,” he said.
Business climate still good
Corporate profit growth in 2019 is “very weak,” Eisenberg continued. Bank and credit union net interest margins are flattening, although rising interest rates helped. Bank ROA is improving, other than by banks that have less than $100 million in assets – which he said explains why there is so much consolidation among banks. The largest banks (assets of $15+ billion) are seeing ROA approaching 1.5%.
“The yield curve is flat, so it will be difficult for credit unions to make money. It is worth thinking about negative interest rates,” he added.
The labor force is growing very slowly, as labor markets are tight. The U.S. has had historic job growth since the year 2000, with close to 2 million new jobs added in 2019 versus 2018, even as inflation has been very low. New unemployment claims are low and have been for years. There are 1.19 jobs per unemployed people. There is a mismatch in skills, which keeps some jobs from being filled.
Wage growth is weak, which is a “blessing and a curse,” explained Eisenberg. On one hand this keeps inflation low, but it also means less money for household spending.
The recent big news — the repo market bailout — was because “we ran out of money.” Eisenberg said everyone knew this would happen sooner or later, because no one knows how much excess reserves are necessary. He said he blames the Fed only for not having a Repo facility ready earlier than the five days it took to get going. He said the issue is not a replay of 2007, it is “purely a technical problem” that can be solved by The Fed keeping its balance sheet open.
Can the economic expansion continue? According to Eisenberg, absolutely it can.
“If the president makes a deal with China tomorrow, the stock market could jump 1,000 points and interest rates would go up,” he said. “The Fed is not driving us into a recession…so the recovery could keep going.”