CUNA Economic Update

August 2019

Mike Schenk

Chief Economist

CUNA Economic Update is sponsored by

2.02

1.901.86

1.751.73

1.71 1.721.74

1.651.68

1.59

1.521.55

1.57

Flight to safety pushing yields down! Ten-Year U.S. Treasury Yields (Percent) // Source: Federal Reserve

2.25

1.570

2

4

6

8

10

12

14

16

18

20

'60 '62 '64 '66 '68 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Percent

Recession Looming?Market Interest Rates and Recessions // Source: Federal Reserve and NBER

Recession

Fed Funds (% left axis)

10-Yr Treasury (% left axis)

-2

0

2

4

6

8

10

12

14

16

'60 '62 '64 '66 '68 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Percent

Tame U.S. Inflation Year-over-year changes in CPI – All Urban Consumers SA // Source: Federal Reserve and NBER

2.25

2.87

0

2

4

6

8

10

12

14

16

18

20

'60 '62 '64 '66 '68 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Percent

Adjusted for Fed Quantitative Easing?Market Interest Rates and Recessions // Source: Federal Reserve and NBER

Recession

Fed Funds (% left axis)

10-Yr Treasury (% left axis)

-0.4

0.1

0.6

1.1

1.6

2.1

2.6

3.1

3.6

Jan-60 Jan-64 Jan-68 Jan-72 Jan-76 Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12 Jan-16

Unemployment Rate GapPercentage point difference between current unemployment rate and the low reading of the 3-month

centered moving average over the past 12 months // Source: BLS and NBER

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

Jan-60 Jan-64 Jan-68 Jan-72 Jan-76 Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12 Jan-16

Unemployment Rate Gap - A Closer ViewPercentage point difference between current unemployment rate and the low reading of the 3-month

centered moving average over the past 12 months // Source: BLS and NBER

50

60

70

80

90

100

110

120

Jan-60 Jan-64 Jan-68 Jan-72 Jan-76 Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12 Jan-16

Consumer Sentiment1966 Q1 = 100 // Source: University of Michigan and NBER

37

38

39

40

41

42

43

Jan-60 Jan-64 Jan-68 Jan-72 Jan-76 Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12 Jan-16

Average Hourly WorkweekProduction & non-supervisory employees // Source: BLS

0

100

200

300

400

500

600

700

800

900

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

S&P 500 Monthly Average(Source: S&P)

Recession Real

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

Jan-60 Jan-66 Jan-72 Jan-78 Jan-84 Jan-90 Jan-96 Jan-02 Jan-08 Jan-14

Residential Investment As a % of GDP // Source: BEA and NBER

0

0.5

1

1.5

2

2.5

3

3.5

4

'82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Percent

Leading Economic IndicatorsPhiladelphia Fed Index // Source: Moody’s, Federal Reserve Bank of Philadelphia and NBER

-1.25%

-0.75%

-0.25%

0.25%

0.75%

1.25%

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Credit Union “Loan Gap”Monthly loan growth minus savings growth // Source: CUNA Monthly Estimates and NBER

Note: I forgot to present this perspective in my video comments! CU monthly loan growth dipped below savings growth prior to each of the past three recessions. It also dipped below savings growth in 1997-1998 (a false positive).

In my view, the current situation is similar to the 1997-1998 experience. In both cases the yield curve inversion was caused by a flight to safety (i.e., falling bond yields) rather than by an overly-aggressive Federal Reserve attempting to slow the economy (as is normally the case). In this regard, I don’t think the negative CU Loan Gap is signaling impending economic contraction.

Recession Indicators

Yield curve inverted? YES!

Yield curve inverted due to Fed rate increases? NO!

Unemployment Gap > 0.2? NO!

Consumer Sentiment > 10-point decline recently? NO!

Avg Hourly Workweek (Manufacturing) declining? YES

ISM Manufacturing Index Below 43? NO!

Stock Market Broadly Declining? NO?

Sharply declining Residential Investment (as a % of GDP)? NO!

Leading Indicators: ~2% decline over 6 months NO!

CU Loan Gap (Mo. Loan Growth < Savings Growth) YES?

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