What Goes Down, Must Come Up

Two economic cornerstones that nearly crumbled during the recession — jobs and housing — are now structurally sound and ready to lift credit unions to the next level of success.

The economic outlook for the rest of 2014 is very favorable for credit union growth. Pages could be written about the pros and cons of all of the facets of the economy, but the two most important drivers for credit union growth and income are jobs and housing.

Job growth is better than we think and will lead to higher wages. Since the great recession, economists (including me) and anyone talking about employment numbers have described the job recovery as disappointing.

Job growth is better than we think and will lead to higher wages.

When you look at Nonfarm Payroll growth alone, that certainly seems to be the case.

After such a horrific plunge in payrolls, everyone wanted to see this metric grow by 250,000 to 300,000 per month in order to catch up quickly. Instead, for the last several years, average monthly payrolls have grown by roughly 180,000, and the job recovery has been labeled as disappointing. But let’s take a deeper look at the jobs picture.


Economists used to estimate the economy needed to produce 150,000 jobs each month to stay even with demographic growth in the labor pool. In the mid-2000’s, estimates of demographic needs were lowered to between 100,000 and 125,000 jobs each month. Today, even that might be overstated. Given retiring baby boomers (plus retirees who postponed retirement until their 401(k)’s healed) and other lesser factors, the number needed to stay even in the labor market could now be as little as 75,000 to 100,000 jobs per month. This means that the economy has already produced roughly 75,000 to 100,000 jobs per month in excess of demographic needs. If we assume another year of growth at 200,000 jobs per month, that will be four years of what could actually be considered very good job growth.

Layered onto this is the likelihood that many jobs lost during the recession are simply not coming back. Downsizing, offshoring, and technical advances have hit lower-skilled jobs especially hard. Many of the current long-term unemployed will remain unemployed without significant job training. This is what is referred to as structural changes.


When these two factors are considered together, labor market slack is likely much less than is being assumed. This is important because economists like to say that the slack in the labor market means wages will continue to grow no more than 2%. But, if I’m right about there being much less slack, wages will finally start to rise this year.

We are already seeing anecdotal evidence of this in many industries. For credit unions, that means consumers with rising paychecks will finally feel more confident and will be willing to take on higher levels of debt.

The argument for the housing market is much simpler, as the supply/demand ratio is very favorable. The frenzy in many markets is over, but in the wake of those huge investor purchases, some have been left with very little supply. When sales were soaring in late 2012 and throughout the first half of 2013, investor purchases (mostly all cash) were over 30% in most markets and as high as 40% in others. Many potential real buyers were left in the dust. The jump in rates was also a shock, but buyers will come to terms with that as the Spring/Summer home selling season returns.

After a four-year depression in housing, there remains much pent-up demand. Yes, there are some changes in the normal patterns, including debt laden college graduates who have been forced to delay home purchases, but more buyers will line-up this season and find supplies are very tight.

Mortgage refinancing activity should continue to decline, but credit unions can expect to see strong growth in purchase mortgages.

Certainly there are risks to the outlook ahead, but we can save those for another article and another time. In the two areas that matter most to credit unions, 2014 should be a very good year.

April 7, 2014

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