ORLANDO Fla. — If you really want to know what the economy is going to do keep an eye on sales of wine, beer and cigarettes, advised Mike Schenck, vice president of economics and statistics for CUNA to attendees here at the Florida Credit Union League's 2007 Annual Convention and Exposition.
Schenk was painting a larger picture, of course–that one of the usual predictors of a recession–an inverted yield curve (the difference between short and long term rates) has historically signaled a downturn. But that hasn't happened yet. "An inversion usually signals a recession and we've never had one without an inverted yield curve. But correlation doesn't imply causation," said Schenk. "So the short answer is, no, I think we'll avoid one. But there is a correlation between consumer confidence and sales of wine, beer and cigarettes," he noted.
Those sales are indicative of consumer confidence and could mean almost as much as the economic charts and graphs number crunchers analyze because they show consumer behavior remains strong despite some troubling signs. And because consumer spending is still robust, despite gas hikes and some related prices going up, the economy will keep chugging along, Schenk said.
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There is a "network effect" to bad news spreading, as in when someone you know loses his or her job. "They talk to five or six other people, who all begin to worry it could happen to them. People will begin to rein in their spending and the Fed is not likely to cut rates as a result. We're predicting that the Fed will move two times this year, and that's at odds with what other economic scenarios," Schenk said. "So maybe we don't go out to dinner every other night," he said.
Overall, the economy is fragile, with slow growth, unemployment drifting up, modest inflation pressure, a very soft housing market and lots of consumer debt, said Schenk. That soft housing market is credited for the wealth effect of the early 2000s, and now that the market has corrected, that will go away. "I wouldn't say the picture is gloomy, but… this will be longer and deeper than real estate agents and their economists would like. Housing will take away one point of the economy as time goes on," he said. What's been keeping spending fairly steady in the face of declining home values has been the S&P 500 Composite, but even that is starting to drift down somewhat as a trend.
For credit unions, it's important to stem the stagnant growth and keep earnings steady. Credit unions grew at a fast clip in the 1950s (11%) and at a 6.7% rate in the 1960s-1970s, he said. But in the 1980s that rate dropped to a mere 2.5% and last year it was a paltry 1.4%. The three long-term targets a CU must keep in its sights are net worth ratio, return on assets and growth. He noted that Digital CU, Massachusetts had an interesting approach. The board built into its strategic planning to keep its capital ratio at 6.8%. "Why? Because then, when the regulators came in they could actually have a conversation with them!"
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