Hurry Up and Wait

Brian Turner
February 28, 2011 | COMMENTS

The driver of an 18-wheeler, having miscalculated his clearance of an overpass, quickly found his rig wedged snuggly between the pavement and the overpass. The area was subsequently swarmed by representatives of the federal transportation authority, state highway engineers, union representatives and various local dignitaries and contingencies each to offer opinion or just to witness the pandemonium. Sophisticated engineering plans and scientific calculations were plotted, each with the objective of how best to free the rig and the appropriate tools to be used as to achieve a prudent long-term recovery plan. 

After two hours of debate, Zachary, a precocious little third-grader, ventured onto the scene. He quickly walked up to the Senior Engineer, alternatively tugging on the man’s khakis and government-issued navy jacket. Finally, the G-man looked down and inquired what the little boy wanted. 

“Mister, why don’t you just let out some of the air from the truck’s tires?” 

In the accompanying 1,250 page report, it was noted that “after complete assessment of the current situation, short-term environmental conditions warranted immediate action requiring government intervention and various tools to stimulate recovery. Federal and local governmental and labor authorities will continue to monitor future developments and will employ policy tools as necessary to support future recovery and ensure that future risk exposures are minimized.” 

As silly as it might seem, this may be more analogous to the current economic climate than what most believe. Yet, billions of dollars are being invested in assessments and trillions of dollars are being spent as part of a potential remedy. 

The Third-Grade Assessment

Consumer spending makes up two-thirds of our nation’s GDP. Led by a 9.5 percent unemployment rate (real unemployment as high as 17 percent), consumers are seriously concerned about their jobs (42 percent of those unemployed have been so for more that 27 weeks). As a result, consumers are deferring their spending especially on big ticket items such as cars, homes and appliances. Instead, they are reducing their debt loads, paying off their existing borrowing to the tune of $125-billion over the past 20 months. 

Credit unions are in the business of extending credit. The climate has resulted in loans outstanding falling more than 1.2 percent in 2010. Vehicle loans are down 7.5 percent and real estate loans up a modest 1.1 percent. By contrast, shares are up nearly 5 percent inflating investment portfolios by 13 percent. 

Road to Recovery

Recovery will accelerate once the private business sector receives more certainty as to federal tax, regulatory and fiscal policies - something that has been lacking over the past few years. This will help to provide more security in the employment sector which in turn will entice consumer spending. Growing demand leads to greater inventory building, services required and, eventually, employment growth. Hundreds of billions of dollars in liquidity will be released that will generate further spending and ultimately, loan growth. Unfortunately, it may take another year or two to realize stability. 

Along the Way

Even though upward pressures will be in place, we will remain in a relatively low interest rate environment until the government gets all 18-wheels back on the road. But, the current rate environment still provide us with an opportunity to retain marginal spreads and we are most likely a couple of years away from having any true adverse earnings risk associated with a rising rate scenario due mostly to our existing liquidity profiles that protects us against upward pressures on cost of funds. As rate increase, those assets which present some aspect of extension risk today will be less a percentage of our balance sheets than today and subsequently less adverse to prevailing or future earnings. In the meantime, they have maximized our earnings profile during the interim. 

But like most things in today’s world, the limits on how much we can build current asset positions this way are based principally on each credit union’s individual liquidity, earnings and risk management profiles. 

So whereas, our solution isn’t as simple as letting air out of the tires, it might not be as complicated as others perceive.

Brian Turner is director of Advisory Services with Southwest Corporate Investment Services. Reprinted with permission from the Texas Credit Union League (www.tcul.coop).