Industry economists agree that if the U.S. plunges off thefiscal cliff Dec. 31, credit unions probably won't see any illeffects right away. However, even if a so-called grand bargain isreached between Democrats and Republicans, credit unions could seethe loan growth momentum gained this year grind to astandstill.

Credit Union Times spoke with five industry economists,the NCUA's John Worth, CUNA's Mike Schenk, NAFCU's David Carrier,the California Credit Union League's Dwight Johnston and CatalystCorporate FCU's Brian Turner. NAFCU Lobbyist Brad Thaler alsoprovided some political perspective.

While the men had some differences of opinion, they agreed onthree key points. The country will likely avoid the doomsdayscenarios threatened by politicians and investment bankers. TheWhite House and lawmakers are likely to negotiate a temporarysolution rather than make major changes. And, regardless of thefiscal solution, the economy is still fragile and will likelyexperience a downturn.

At press time, the White House and Republican leaders were stillmiles away from an agreement on how to solve the nation's budgetwoes. However, the economists said three basic solutions arepossible. Both Republican and Democrats agree to increase taxes,cut spending or a combination of both worth $3 trillion. Both sidesagree to increase revenue and decrease spending but delayimplementation until after the economy can absorb it. Or both sidesreach a temporary solution that kicks the can down the road.

Schenk said if a grand bargain combination of tax increases andspending cuts is reached, the result would “choke off the housingrecovery and push us back into recession.” That's not good news,but Schenk added that doing nothing would only intensify a currentlack of clarity about the future, which would hamper both businessconfidence and consumer confidence.

“If that happens, people will reduce spending on big ticketitems, which means less lending for credit unions.”

Worth agreed, recalling that when the federal government createdan impasse in 2011 as it debated a solution to the debt ceiling,consumer confidence plummeted from a rating of 70 in June to just55 in August.

Although Worth said he's observed consumer interest in thefiscal cliff doesn't seem as great as it was during the debtimpasse, it would still impact consumers' view of the future andresult in less consumer spending and a weaker economy.

“We could get the worst of both worlds,” Worth said. “We couldgo over the cliff, and then get a deal next year that kicks the candown the road. We could take a hit on the economy through weakerconsumer sentiment and still have any deficit benefit to show forit.”

Johnston agreed that consumer confidence is a bigger risk to theeconomy than the effect of tax increases or spending cuts.Businesses already lack confidence, he said, so fiscal cliff issuesare a bad way to end the year and begin the next.

Carrier noted that because of the economic slowdown in China andEurope's ongoing problems, the United States is actually drivingthe U.S. economy. Should the already fragile economy here takeanother hit, the entire world would feel it, he said.

Turner said the way the fiscal cliff solution impacts job growthwill have a bigger impact than a decrease in consumer confidence orhigher taxes. Consumers aren't spending less money because they'reanticipating a smaller or no tax refund, but rather, jobinsecurity.

“My mantra has always been, I don't care what people arefeeling, it's what they're doing that's important,” he said. “Eventhough they are feeling better, they're still not spending.”

The economists agreed that the likely outcome of the fiscalcliff will be a temporary slowing of loan growth for credit unions,although they also said the long-term outlook for credit unionlending is better, and the economy could even rebound in a big wayin a couple of years.

However, opinions were mixed on how the fiscal cliff couldimpact liquidity.

Worth said liquidity could go either way. Consumers could take aflight of safety out of equities markets and into federally insuremoney market accounts. However, if the economy sours and taxesincrease, they would have less money to deposit, so it could be awash. Turner agreed that liquidity is unlikely to be affected byfiscal cliff issues because even if taxpayers have fewer refundsand year-end bonuses to deposit, loan outflow is still weak, soseasonal liquidity trends and loan to share ratios wouldn't begreatly impacted.

Schenk, however, said a double dip recession could mean moreliquidity, as nervous consumers increase savings and borrow less.CUNA is forecasting that the worst effects of the fiscal cliff willbe avoided, and the economy will continue to grow at a sluggishpace, with a 2.5% annual growth in 2013 and no significant drop inthe unemployment rate. The trade association is also predictingthat loan balances will gain 5% in 2013, provided a fiscal cliffsolution gives consumers and businesses clarity about thefuture.

Johnston agreed, saying “all bets off for next six months.Nobody can really predict anything until we get past that.”

NAFCU's Thaler and Carrier were far more concerned about thepotential for the credit union tax exemption to get caught up infiscal cliff negotiations, not directly, but boxed in ifpoliticians agree to cut a set number of tax expenditures in 2013and set up pick-and-choose scenario next year.

“We don't want to get stuck inside a tax reform box and have tofight our way out,” Thaler said.