2010 has got to be better than 2009… Right?
November 18, 2009
This statement sounds eerily similar to the statement we heard from many people in 2008 about 2009.
By now most have read or heard the U.S. financial highlights for 3rd Qtr 2009. Headlines touted the 3.5% annualized growth in GDP. It is important for any business to evaluate the sustainability of this “good news” and how long it will take to have positive impact as they are making financial and business decisions, especially for 2010 and quite possibly through 2011.
We are starting to hear from many credit union managements and boards that they believe PLL will begin to decline and loans will start to increase in 2010. While everyone hopes this is the case, there is still a tremendous amount of uncertainty. Therefore, we believe it is beneficial to… hope for the best, but prepare for the worst for at least one more year. This means evaluating various scenarios for financial performance instead of landing on, or promising, one set of financial numbers to your board. This effort can go a long way to appropriately managing expectations and reducing frustration for all stakeholders.
A few reasons we bring this to light. Consider the following:
While the recent GDP growth would seem like good news on the surface, further evaluation of the numbers suggests that there could be more trouble ahead and a sustained recovery is not necessarily underway. In looking at the details, a considerable portion of the growth in GDP was a result of government spending, including the Cash for Clunkers program. The Cash for Clunkers program factored into the consumption/consumer spending portion of the GDP equation and certainly did help to increase auto sales over the summer. However, it “pulled sales forward,” which means auto sales figures are likely to be far less rosy in the coming months. Consumption is critical, as it has accounted for 70% of the economy since 2002 (67% 1929 to 2008). If Americans are uncertain about their jobs or the economy (consider consumer confidence falling to 47.7 in October), they will likely continue to save, putting further pressure on GDP growth and ultimately job growth going forward.
While the economy did grow in the 3rd Qtr, it did not translate to any net improvement in the unemployment picture. Unemployment has continued to rise, from 9.8% in September 2009, to 10.2% in October 2009. From a historical standpoint, unemployment is at its highest level since March 1983 when it stood at 10.3%. (For perspective, note that unemployment was at only 5.0% a short 18 months ago.) Unemployment is a lagging indicator, meaning that even after the economy ultimately stabilizes and begins to grow, it is likely that unemployment will to continue to increase for a period of time. In looking at historical data, some post-recessionary periods have seen quick improvement in U.S. employment, while others have not. For the recession ending in March of 1975, unemployment peaked 2 months later in May of 1975 and then began to fall. However, when the 2001 recession ended in the 4th Qtr of 2001, the unemployment rate stood at 5.7% and remained at 5.7% or higher until April 2004. Some economists believe we are headed toward the slower job recovery scenario seen in the years following the 2001 recession. Either way, as noted earlier credit unions might be wise to consider the old adage… hope for the best, but prepare for the worst.