CU Economist on Unemployment, Liquidity, Members, and the Fed

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As the COVID-19 pandemic throws off the trajectory of loans, deposits and other best-laid plans, the post-crisis economic conversation for credit unions begins right now according to Sonoma State University Economist and Redwood CU Board Member Robert Eyler.

Forecasts abound as to whether the nation will enter a V, U, W or dreaded “L-shaped” recovery — even check-mark shaped, some say. Eyler said that credit unions’ response to local economic performance across a patchwork of regions in California and Nevada will be crucial to their future plans and engagement with members.

He answered some important questions for credit union leaders going into the next 2 – 4 weeks:

Where could the unemployment picture end up in California and Nevada, and why?
For California and Nevada, we may be at the peak of unemployment insurance claims by mid-May or sometime in June. Once that peaks, about 6 – 9 months later we will likely see a peak in the actual unemployment rate, which could hit 15 percent in California and 17 percent in Nevada. Right now, we are probably approaching 10 percent in both states.

It’s very hard to know since unemployment insurance claims may overstate the final result, given the federal stimulus and the fact that some workers may lose jobs initially and then get them back. Credit unions can think about that timeline given recent history and where we seem to be going with claims on an ongoing basis.

Projecting future unemployment claims and unemployment rates for California and Nevada is also tricky because there’s just a lot of uncertainty right now. Financial markets are trying to figure this out, as it has a connection to economic growth and profits and revenues for businesses.

What are topics worth tuning-out versus important issues credit unions should take note of?
The best thing to watch now is initial unemployment claims data at the county level that’s coming within the next week, and the quarterly average unemployment data and industry data — not the monthly data which is noisy.

Unemployment numbers will be relatively shocking on a month-to-month basis, but those data should not be believed prima facie as evidence of anything. The federal stimulus and Federal Reserve policies are meant to temper that rise after one quarter.

Also watch for commuter traffic to tick up, energy usage to tick up, and hotel stays to begin rising — more on the positive side versus the job numbers.

How can credit unions react accordingly to what’s perceived to be happening in the economy (or not) in real-time versus 6 – 12 months from now?
The main things we know is that tourism and related industries are the first in and likely the last out of this recession. Also, the coming-out party may be quick at first but then flatten, which comes with further clarity of who still has a job and who does not.

The risk of a COVID-19 repeat or a re-infection situation will show up, or not, as we creep up on wintertime. But if a vaccine is announced and starts getting implemented, expect a large positive economic spike. And a continued recovery in the equity and financial markets will also help reduce the negative wealth effect if risks otherwise begin to fall.

However, there is potential for issues in corporate debt markets for larger lenders. If the corporate bond market has problems, that can have a broader effect on equity markets, and then on smaller lenders like credit unions and community banks. That may force a transfer of liquidity infused into the markets by the Federal Reserve toward larger banks to salvage corporate debt markets.

What types of credit unions will “stand out” during this period regarding their economic response, balance-sheet management, and engagement with members and employees?
Overall, well-capitalized and balanced portfolios are going to help a lot.

Credit unions that have balance sheets with assets that are booked with a narrow focus may be more exposed to risk. Those that have a lot of business loans may have a bit more pressure if we see corporate bankruptcies rise as businesses fold.

But if consumers come back and we can get through the summer and early fall, things should be good — as long as we don’t have a repeat COVID-19 episode.

Is there any chance of a “liquidity crisis” gaining a foot in the credit union industry?
Probably not. Cash balances are likely to rise initially based on federal monies coming to people, and also the loans to businesses. The Federal Reserve is also likely to be engaged in quantitative easing again — “QE 5” if you will — to provide liquidity to banks as needed. Regulators will be very concerned about cash balances and stress tests against liquidity.

However, the key is expected loan losses coming to fruition, so you may see credit unions and banks have nasty earnings-and-loss statements initially. If a real estate problem is avoided, earnings may snap back later this year or next year because the risk falls away.

Banks recently reported OK numbers in general. But having the lending market hold up over the long term will be critical to liquidity concerns.

What’s the latest economic news credit union leaders should pay attention to?
The three main things that are starting to emerge include: initial claims for unemployment are now rising; jobs data have come out for the U.S. for March (not amazingly revealing); and the International Monetary Fund (IMF) has now provided a revised forecast for the U.S. of -5.9 percent Gross Domestic Product (GDP) reduction in 2020 and then +4.7 percent for 2021. Those are both historic swings. 

What can credit unions learn from this period in history regarding unprecedented collaboration between the Federal Reserve, Treasury Department and Congress?
This is similar coordination to what we saw in 2008 - 2009, but it’s at larger magnitudes and timed in a synchronous way — rather than monetary aid first and hard, and then fiscal aid nine months later.

This coordination should help quicken the pace of positive change once the turn is happening, and more of a permanent change as the risk of a no vaccine-repeat scenario wanes.

How could different types of workers and households be changed in the long-term due to COVID-19’s economic fallout? And how can credit unions respond?
Undocumented individuals will be impacted. They will miss the federal stimulus payments and then may also be in a very competitive environment for work if there is a lot of unemployment.

Between immigration changes and increasing competition, we are likely to have some serious tests of the actual — not just classic payroll — labor market for undocumented workers. Just the reduced cash flow from the shelter-in-place policies may change many lives of those who are undocumented.

What might credit union leaders say in 6 to 12 months about their response to members and operations after the Coronavirus took a devastating toll on local economies?
I think credit union leaders will say they helped their members, employees and communities as much as they could, and that it look a large amount of effort by their employees to get through the initial stages of the crisis.

Some will also say that their strategic plans were completely upended by this based on the impact to their communities.

Others will also say this crisis forced changes they knew were coming, such as working from home for some employees and considerations around branch expansion versus mobile-device unemployment insurance expansion.

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