6 FOCUSREPORT/Foresight Is 2020
With the teens past and the ’20s upon us, CUNA Mutual
Group Chief Economist Steven
Rick spent a half hour sharing
his thoughts on
credit unions are
In short, Rick
said credit unions
can expect loan
growth to continue
to slow and savings
Meanwhile, banks will be
breathing down their necks. That
should sound familiar.
But he also said interest
rates are likely to fall further,
squeezing margins and sending
the U.S. economy into a “growth
recession.” Those trends will
force credit union boards and
managers to consider the financial
equivalent of the “Upside Down”
realm depicted in the “Stranger
Things” Netflix series: Negative
interest rates, when members get
paid to borrow and pay to save.
Rick started his career as an
economist at CUNA in Madison,
Wis., in 1992, and was appointed
chief economist of CUNA Mutual
Group in Madison in 2014. He’s
also been a board member at
University of Wisconsin Credit
Union since 2004 and senior
lecturer at the University of
Wisconsin in Madison since 1999.
CU Times: Loan portfolio
growth has been slowing. What do
you expect for 2020?
Rick: We’re forecasting 5.5%
growth, which is below the 7%
five-year average, so I would
define it as a weak year. In 2019,
we saw growth of 6.5%, which is
also a weak year. Both of those
years follow way-above-trend
growth of 11% to 12%.
You see the natural credit cycle
playing out. We have three or four
years of very strong borrowing
and spending, followed by the
next three or four years of weaker
CU Times: What direction
do you see the economy going
in 2020? Is it going to continue
growing or turn down?
Rick: Right now we’re growing
at a 2% pace. We may actually drop
below 1.5% in the fourth quarter, a
big dip, maybe 1.3%. We may see
a little bit of a bump in the first
quarter, but then slowing down
through the rest of the year from
the 2% long-term trend growth to
1.4% to 1.5%. So maybe it’s not a
full-blown recession, but kind of a
growth recession, where growth is
not as fast as normal.
CU Times: What role will
interest rates play?
Rick: We had been forecasting
interest rates to keep rising
through 2019 and into 2020,
but we’ve had this Powell pivot.
[Federal Reserve Chairman
Jerome] Powell has lowered
interest rates three times over the
last four or five months.
A lot of credit unions are
worried about their margin
compression, and that their
earnings will be under pressure
because of that.
You have a lot of headwinds
blowing right now: Slower loan
growth, lower interest rates. Both
of those will combine to really
push down earnings in 2020.
CU Times: Can’t credit unions
just change their rates?
Rick: With interest rates falling,
credit unions haven’t really
pushed down their deposit rates
yet. They’re worried about runoff.
If they’re not matching the bank
down the street, their members
will pull out their bank deposits or
CDs or money markets and move
across the street to the bank or
another credit union.
CU Times: What’s behind the
slowdown in auto lending?
Rick: A lot of businesses have
pulled back on their capital
spending because of the trade
war and all the uncertainty. The
decline in business lending has led
banks to pursue consumer loans
more aggressively, including auto
loans. They’re really pushed hard,
and that’s stealing some business
away from credit unions.
CU Times: The real estate
market was a surprise in 2019.
Where do you see that going?
Rick: The real estate market is
holding up pretty well, especially
with the big drop in interest
rates. You see a lot of new home
construction. The existing housing
market is holding up because of
the lower rates.
We expect in 2020 that the
housing market will do well. We
still have jobs being created. You
will have the demographic effect
of a lot of millennials in their
prime home-buying age buying
homes in the next year or so.
CU Times: You and other
economists have been saying
consumer spending is holding up
the economy. Your latest report
mentions “consumer fatigue.”
What is that?
Rick: People have been
spending above average on
durable goods like cars, so in the
future we’ll see less. We’re seeing
a big increase in the savings rate
in this country. You always want
people to save, but it’s a little bit of
a drag on the economy if people
are saving and not spending.
CU Times: How can credit
unions respond to margin compression? What will become more
important, or less important?
Rick: With margin compression
you will see a more watchful eye
on how fast they want to expand
their branch activity and buy new
equipment. They may not open as
many branches, and they might
not invest as much to modernize
and upgrade their computer sys-
tems for online and mobile bank-
CU Times: How much effect
will this have on ROA? It’s been
very high the last few years.
Rick: CUNA Mutual’s forecast
for 2019 is 0.95% and 0.85% for
2020. It was 0.91% in 2018, and
0.80% is the previous five-year
average. The rule of thumb in
the banking world was 100 basis
points is what you’d shoot for, so
85 basis points is below the long-run average you would shoot for.
Since the Great Recession, we’ve
been below that 1%, mainly due to
margin compression. The interest
rates have been so low, thanks to
the Federal Reserve, that we’ve
lost a lot of margins.
CU Times: You can’t go below
Rick: There’s a bank in the
Netherlands that has a negative
interest rate on their mortgages
now. The bank actually pays you
to borrow money. I think it’s a
negative 0.5% on their mortgage. It
turns the whole world of banking
upside down. Traditionally a
borrower funds a bank or credit
union by paying interest. But in
the world of negative interest
rates, savers would be the ones
who fund the credit union. The
negative rate on savings would be
greater than the negative rate on
CU Times: That sounds like the
Upside Down in the “Stranger
Rick: There are actually six
countries in the world now with
negative interest rates. There are
a couple Federal Reserve Boards
of Governors who say we could be
If rates keep falling in the
United States, that’s something
credit union boards will have to
discuss. It may not go negative,
but how low could it go in the
United States? Lower than we’ve
ever seen, which means margins
will be tighter than we’ve ever
CU Times: Would consumers
Rick: If it’s not too negative, like
a negative 0.5%, that’s just kind
of like charging you a fee to keep
your money there. If you have to
go to minus 1% or minus 2%, so
that you put $100 in your account
and only get $98 back, how many
members will say, ‘I’ll just keep
my money in a coffee can.’?
CU Times: Powell is still talking
about a 2% inflation rate target. Is
Rick: They’ll have a hard time
hitting that target.
CU Times: What are you
predicting for the inflation rate in
Rick: Below 2%. The value of
the dollar is still rising, and as
the dollar goes up, import prices
fall. And as import prices fall,
that drags down overall inflation
in this country. You go into a
Walmart and half the items are
imported. Right now import
prices are falling about 1.5%. We
are importing deflation when we
are importing goods from around
the world. That means American
prices can’t rise because they
have to compete against all those
imports. Also, oil prices are falling
and are expected to fall in 2020.
CU Times: So that’s going to
keep inflation below the Fed’s
Rick: The Fed keeps thinking
that if they lower interest rates it
will stimulate the economy, and
push inflation up to the 2% target. But just like Japan the last
30 years, they’ve had a hard time
getting their inflation up. They’ve
been living through deflation
these last 30 years. It’s called the
Japanification of the world. n
CUs Should Consider the ‘Upside Down’ for the 2020s
Y What goes up, must ... at least slow down,
according to one economist.
Y Interest will compress and ROA will fall in 2020.
Y Negative interest rates mean CUs could pay
members to borrow.
‘We expect in 2020 that
the housing market will
do well ... You will have
the demographic effect
of a lot of millennials
in their prime home-
buying age buying
homes in the next year
‘There are actually six
countries in the world
now with negative
interest rates ... If rates
keep falling in the
United States, that’s
something credit union
boards will have to