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Making Sense of Economic Change

Every day we’re faced with new statistics that may shape our thoughts about where the economy is and where it’s going.  For example, household borrowing grew in 2011 and, as recently as January, was increasing at an annual rate of 8.6%.  GDP has been increasing for the last three quarters and unemployment is decreasing.  But negative trends like rising gas prices and sluggish personal income growth make it unclear where the economy is headed.

How do you wade through the hundreds of statistics to make sense of it?  A better question is:  What would you do differently if you knew? One of the interesting results of a recession is that some companies emerge stronger than they were pre-recession.  In 2009 during the thick of the Great Recession, management author Dr. Donald Sull, a professor at the London Business School, offered several ideas for managing successfully in a downturn including:

  • Instill ongoing cost discipline
  • Force hard choices
  • Seize golden opportunities

Many credit unions would look at the first two bullet points and say that they have been living those tactics for the last few years.  An economic downturn provides the urgency to better manage costs and force hard choices.  Some credit unions found that they could operate more efficiently and reduce some of the expenses that seemed to proliferate during boom times.  Others mustered the organizational will to close a branch that was not performing as hoped.  “The downturn lowers their resistance to change and cuts through complacency,” says Sull.

Is now the time to breathe a sigh of relief and relax?  Identifying opportunities for efficiencies and making hard choices that fit the organization’s strategy are always a good idea, regardless of economic times.  Credit unions that function this way generally find themselves in a better position to weather hard times and seize opportunities when they are presented, such as investing in starting or improving upon a business line.

So what would you do differently if all economic signs pointed to a strong recovery?  Probably lots of things, but the commitment to cost discipline and making difficult choices that has been forged during hard times is worth preserving.

Source:  Seizing the Upside of a Downturn, Donald Sull, Financial Times, 1/22/09

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2010 has got to be better than 2009… Right?

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.

Source Data:
http://www.gpoaccess.gov/usbudget/fy05/hist.html

http://www.cepr.net/index.php/data-bytes/gdp-bytes/c4c-drives-growth/

http://www.nber.org/cycles/cyclesmain.html