Jake Cooke, writer for The Credit Union Connection

On Aug. 8, TruStage Chief Economist Steve Rick shared insights during TruStage’s Discovery2024 conference on economic trends, as well as what type of impact these trends could have, specifically on credit unions.

Rick projected that a recession is not likely to occur in the near future, however, there are some factors that could trigger a recession, such as:

• An increase in energy prices

• The Federal Reserve keeping short-term Fed fund interest rates too high for too long

• Higher long-term interest rates

As far as overall economic growth, Rick forecast growth at 1.8% for 2025, below the trend baseline.

See additional coverage of the TruStage Discovery2024 Virtual Conference here.

At the current point in the labor market, the demand for labor is exceeding the supply of labor. This has resulted in bargaining power shifting towards employees, and thus overall wages have increased. We note that these wage increases are only keeping up with inflation and do not represent a significant increase in purchasing power. We are also in a time of high labor turnover, which has subsequently led to a decrease in labor productivity growth, according to Rick.

Inflation spiked to 9% in 2021 and has since declined to 3.3%, but it’s still above the desired baseline. The Fed has been trying to combat inflation by raising interest rates. To calculate the real interest rate, economists use the formula: real interest rate = nominal interest rate - inflation. Currently the real interest rate is sitting at 2.05%. It cannot be raised much more, as approaching a 3% real interest rate results in recession. The Fed’s rate has been high for a while because it takes a long time to drive the desired effects. However, Rick projected that the inflation rate will fall over the course of next two years.

During recessions, the Fed increases the money supply. For example, during the coronavirus pandemic, there was a severe contraction of the economy resulting from the lockdowns. To combat this, the Fed drastically increased the money supply, reaching a 27% increase in 2021, which is the highest in the history of the country. Then the supply growth rank shrank, until for a period in 2023 the money supply actually shrank. As it stands currently, the money supply is growing, but slowly, well below the baseline of 5.4%.

What does this mean for credit unions?

A significant drawdown of member savings is taking place in credit unions. Average savings per member adjusted for inflation peaked in 2021, at $15,722. However, as people struggled through the financial hardship from the COVID pandemic and the extra government funds ran out, they had to draw down their savings, decreasing it to an average of $13,843 per member.

On the bright side, Rick predicts that the worst of the savings drawdown is over now.

Additionally, Rick forecasts that credit union loan growth will slow in the next couple years. He is expecting that it will dip below a 5% growth rate, well below the average baseline growth rate of 7%. With interest rates as high as they are, people are not taking on loans at the rate that they normally would. Furthermore, a lot of credit unions are restricted on the amount of loans they are able to provide because they have loaned out so much already and liquidity is a concern. Credit unions now are struggling with incredibly low liquidity, and don’t have enough assets they can turn into loans. Meanwhile, credit unions CDs have become very popular, with CD growth peaking at 70% in 2023, and it’s still sitting quite high at 35%. This money credit unions are paying 4-5% interest on, which is pushing up cost of funds for credit unions as they battle for savings market share to continue funding loans.