Economic Update December 2018 If you have any questions or comments, please contact: Steven Rick, Chief Economist CUNA Mutual Group – Economics 800.356.2644, Ext. 665.5454 steve.rick@cunamutual.com

5 Minute Federal Reserve Board Meeting

5 Minute Federal Reserve Board Meeting Federal Reserve’s Dual Mandate

5 Minute Federal Reserve Board Meeting Federal Reserve’s Dual Mandate Stables Prices

5 Minute Federal Reserve Board Meeting Federal Reserve’s Dual Mandate Stables Prices Full Employment of Resources

5 Minute Federal Reserve Board Meeting Federal Reserve Critical Measures Federal Reserve’s Dual Mandate Stables Prices Full Employment of Resources

5 Minute Federal Reserve Board Meeting Federal Reserve Critical Measures Federal Reserve’s Dual Mandate Stables Prices Full Employment of Resources Long-Run Equilibrium Goal Actual

5 Minute Federal Reserve Board Meeting Federal Reserve Critical Measures Federal Reserve’s Dual Mandate Stables Prices Full Employment of Resources Long-Run Equilibrium Goal Actual Inflation Rate 2% 2.0%

5 Minute Federal Reserve Board Meeting Federal Reserve Critical Measures Federal Reserve’s Dual Mandate Stables Prices Full Employment of Resources Long-Run Equilibrium Goal Actual Inflation Rate 2% 2.0% Unemployment Rate 5% 3.7%

Labor Market Beyond Full Employment

Labor Market Beyond Full Employment

Labor Market Beyond Full Employment

Improving Credit Quality As Unemployment Falls

5 Minute Federal Reserve Board Meeting Federal Reserve Critical Measures Federal Reserve’s Dual Mandate Stables Prices Full Employment of Resources Long-Run Equilibrium Goal Actual Inflation Rate 2% 2.0% Unemployment Rate 5% 3.7% Economic Output Gap 0% 1.0%

Positive GDP Output Gap in 2018 With the Economy Moving Above its Potential Level of Output

Positive GDP Output Gap in 2018 With the Economy Moving Above its Potential Level of Output

5 Minute Federal Reserve Board Meeting Federal Reserve Critical Measures Federal Reserve’s Dual Mandate Stables Prices Full Employment of Resources Long-Run Equilibrium Goal Actual Inflation Rate 2% 2.0% Unemployment Rate 5% 3.7% Economic Output Gap 0% 1.0% Fed Funds Interest Rate 3% 2.18%

Positive GDP Output Gap in 2018 With the Economy Moving Above its Potential Level of Output

5 Minute Federal Reserve Board Meeting Federal Reserve Critical Measures Federal Reserve’s Dual Mandate Stables Prices Full Employment of Resources Long-Run Equilibrium Goal Actual Inflation Rate 2% 2.0% Unemployment Rate 5% 3.7% Economic Output Gap 0% 1.0% Fed Funds Interest Rate 3% 2.18% 10-Year Treasury Rate 4% 3.25%

Examples of some early data experiments that could benefit CUs: Currently making significant investments in data & analytics infrastructure. Some insights generated through this expanded capability will be shared with CU customers. Examples of some early data experiments that could benefit CUs: Loan generation – can credit bureau data be used to drive incremental lending on behalf of credit unions Claims processing – how do we increase straight-through claims processing to solve member problems, increase CU loyalty and reduce operating costs

CD and MMA Interest Rates Poised to Rise in 2019

Examples of some early data experiments that could benefit CUs: Rising Long-term Interest Rates in 2018: Currently making significant investments in data & analytics infrastructure. Some insights generated through this expanded capability will be shared with CU customers. Examples of some early data experiments that could benefit CUs: Loan generation – can credit bureau data be used to drive incremental lending on behalf of credit unions Claims processing – how do we increase straight-through claims processing to solve member problems, increase CU loyalty and reduce operating costs

Examples of some early data experiments that could benefit CUs: Rising Long-term Interest Rates in 2018:  U.S. inflation ( Poil,  Wages) Currently making significant investments in data & analytics infrastructure. Some insights generated through this expanded capability will be shared with CU customers. Examples of some early data experiments that could benefit CUs: Loan generation – can credit bureau data be used to drive incremental lending on behalf of credit unions Claims processing – how do we increase straight-through claims processing to solve member problems, increase CU loyalty and reduce operating costs

Examples of some early data experiments that could benefit CUs: Rising Long-term Interest Rates in 2018:  U.S. inflation ( Poil,  Wages) Fiscal Package (more inflation than growth) Currently making significant investments in data & analytics infrastructure. Some insights generated through this expanded capability will be shared with CU customers. Examples of some early data experiments that could benefit CUs: Loan generation – can credit bureau data be used to drive incremental lending on behalf of credit unions Claims processing – how do we increase straight-through claims processing to solve member problems, increase CU loyalty and reduce operating costs

Examples of some early data experiments that could benefit CUs: Rising Long-term Interest Rates in 2018:  U.S. inflation ( Poil,  Wages) Fiscal Package (more inflation than growth) Federal Reserve shrinking balance sheet Currently making significant investments in data & analytics infrastructure. Some insights generated through this expanded capability will be shared with CU customers. Examples of some early data experiments that could benefit CUs: Loan generation – can credit bureau data be used to drive incremental lending on behalf of credit unions Claims processing – how do we increase straight-through claims processing to solve member problems, increase CU loyalty and reduce operating costs

Examples of some early data experiments that could benefit CUs: Rising Long-term Interest Rates in 2018:  U.S. inflation ( Poil,  Wages) Fiscal Package (more inflation than growth) Federal Reserve shrinking balance sheet ECB exiting QE Currently making significant investments in data & analytics infrastructure. Some insights generated through this expanded capability will be shared with CU customers. Examples of some early data experiments that could benefit CUs: Loan generation – can credit bureau data be used to drive incremental lending on behalf of credit unions Claims processing – how do we increase straight-through claims processing to solve member problems, increase CU loyalty and reduce operating costs

Examples of some early data experiments that could benefit CUs: Rising Deficits Currently making significant investments in data & analytics infrastructure. Some insights generated through this expanded capability will be shared with CU customers. Examples of some early data experiments that could benefit CUs: Loan generation – can credit bureau data be used to drive incremental lending on behalf of credit unions Claims processing – how do we increase straight-through claims processing to solve member problems, increase CU loyalty and reduce operating costs

What causes Recessions?

What causes Recessions? Necessary condition: Overheating economy:

What causes Recessions? Necessary condition: Overheating economy: Tight labor market =>  wages & prices

What causes Recessions? Necessary condition: Overheating economy: Tight labor market =>  wages & prices Financial imbalances or excesses => bursting asset bubbles

What causes Recessions? Necessary condition: Overheating economy: Tight labor market =>  wages & prices Financial imbalances or excesses => bursting asset bubbles (2001 stock market, 2008 housing market)

What causes Recessions? Necessary condition: Overheating economy: Tight labor market =>  wages & prices Financial imbalances or excesses => bursting asset bubbles (2001 stock market, 2008 housing market) Exogenous/External Shocks

What causes Recessions? Necessary condition: Overheating economy: Tight labor market =>  wages & prices Financial imbalances or excesses => bursting asset bubbles (2001 stock market, 2008 housing market) Exogenous/External Shocks (terrorist attack, war, trade war)

What causes Recessions? Necessary condition: Overheating economy: Tight labor market =>  wages & prices Financial imbalances or excesses => bursting asset bubbles (2001 stock market, 2008 housing market) Exogenous/External Shocks (terrorist attack, war, trade war) High inflation => Excessive monetary policy tightening

What causes Recessions? Necessary condition: Overheating economy: Tight labor market =>  wages & prices Financial imbalances or excesses => bursting asset bubbles (2001 stock market, 2008 housing market) Exogenous/External Shocks (terrorist attack, war, trade war) High inflation => Excessive monetary policy tightening High Inventories => inventory correction

Stronger Economic Growth in 2018, around 3.0%, and 2.3% in 2019% Currently making significant investments in data & analytics infrastructure. Some insights generated through this expanded capability will be shared with CU customers. Examples of some early data experiments that could benefit CUs: Loan generation – can credit bureau data be used to drive incremental lending on behalf of credit unions Claims processing – how do we increase straight-through claims processing to solve member problems, increase CU loyalty and reduce operating costs

Examples of some early data experiments that could benefit CUs: Recessions occur where there is too little spending to keep an economy’s resources from falling idle. Currently making significant investments in data & analytics infrastructure. Some insights generated through this expanded capability will be shared with CU customers. Examples of some early data experiments that could benefit CUs: Loan generation – can credit bureau data be used to drive incremental lending on behalf of credit unions Claims processing – how do we increase straight-through claims processing to solve member problems, increase CU loyalty and reduce operating costs

Examples of some early data experiments that could benefit CUs: Recessions occur where there is too little spending to keep an economy’s resources from falling idle. Six Factors Pointing to a Recession in 2020. Currently making significant investments in data & analytics infrastructure. Some insights generated through this expanded capability will be shared with CU customers. Examples of some early data experiments that could benefit CUs: Loan generation – can credit bureau data be used to drive incremental lending on behalf of credit unions Claims processing – how do we increase straight-through claims processing to solve member problems, increase CU loyalty and reduce operating costs

Examples of some early data experiments that could benefit CUs: Recessions occur where there is too little spending to keep an economy’s resources from falling idle. Six Factors Pointing to a Recession in 2020. The credit cycle drives the business cycle. Currently making significant investments in data & analytics infrastructure. Some insights generated through this expanded capability will be shared with CU customers. Examples of some early data experiments that could benefit CUs: Loan generation – can credit bureau data be used to drive incremental lending on behalf of credit unions Claims processing – how do we increase straight-through claims processing to solve member problems, increase CU loyalty and reduce operating costs

Examples of some early data experiments that could benefit CUs: Recessions occur where there is too little spending to keep an economy’s resources from falling idle. Six Factors Pointing to a Recession in 2020. The credit cycle drives the business cycle. The recent fiscal stimulus in the form of government spending and tax cuts will fade in 2020. Currently making significant investments in data & analytics infrastructure. Some insights generated through this expanded capability will be shared with CU customers. Examples of some early data experiments that could benefit CUs: Loan generation – can credit bureau data be used to drive incremental lending on behalf of credit unions Claims processing – how do we increase straight-through claims processing to solve member problems, increase CU loyalty and reduce operating costs

Examples of some early data experiments that could benefit CUs: Recessions occur where there is too little spending to keep an economy’s resources from falling idle. Six Factors Pointing to a Recession in 2020. The credit cycle drives the business cycle. The recent fiscal stimulus in the form of government spending and tax cuts will fade in 2020. The Federal Reserve raising interest rates 1 percentage point by 2020, reducing borrowing. Currently making significant investments in data & analytics infrastructure. Some insights generated through this expanded capability will be shared with CU customers. Examples of some early data experiments that could benefit CUs: Loan generation – can credit bureau data be used to drive incremental lending on behalf of credit unions Claims processing – how do we increase straight-through claims processing to solve member problems, increase CU loyalty and reduce operating costs

Examples of some early data experiments that could benefit CUs: Recessions occur where there is too little spending to keep an economy’s resources from falling idle. Six Factors Pointing to a Recession in 2020. The credit cycle drives the business cycle. The recent fiscal stimulus in the form of government spending and tax cuts will fade in 2020. The Federal Reserve raising interest rates 1 percentage point by 2020, reducing borrowing. Rising interest rates and a stronger dollar will decrease export growth. Currently making significant investments in data & analytics infrastructure. Some insights generated through this expanded capability will be shared with CU customers. Examples of some early data experiments that could benefit CUs: Loan generation – can credit bureau data be used to drive incremental lending on behalf of credit unions Claims processing – how do we increase straight-through claims processing to solve member problems, increase CU loyalty and reduce operating costs

Examples of some early data experiments that could benefit CUs: Recessions occur where there is too little spending to keep an economy’s resources from falling idle. Six Factors Pointing to a Recession in 2020. The credit cycle drives the business cycle. The recent fiscal stimulus in the form of government spending and tax cuts will fade in 2020. The Federal Reserve raising interest rates 1 percentage point by 2020, reducing borrowing. Rising interest rates and a stronger dollar will decrease export growth. Trade wars and tariffs are reducing world trade, which historically is a precursor to a recession. Currently making significant investments in data & analytics infrastructure. Some insights generated through this expanded capability will be shared with CU customers. Examples of some early data experiments that could benefit CUs: Loan generation – can credit bureau data be used to drive incremental lending on behalf of credit unions Claims processing – how do we increase straight-through claims processing to solve member problems, increase CU loyalty and reduce operating costs

Examples of some early data experiments that could benefit CUs: Recessions occur where there is too little spending to keep an economy’s resources from falling idle. Six Factors Pointing to a Recession in 2020. The credit cycle drives the business cycle. The recent fiscal stimulus in the form of government spending and tax cuts will fade in 2020. The Federal Reserve raising interest rates 1 percentage point by 2020, reducing borrowing. Rising interest rates and a stronger dollar will decrease export growth. Trade wars and tariffs are reducing world trade, which historically is a precursor to a recession. Recessions typically begin 2 ½ years after the economy begins to overheat. Currently making significant investments in data & analytics infrastructure. Some insights generated through this expanded capability will be shared with CU customers. Examples of some early data experiments that could benefit CUs: Loan generation – can credit bureau data be used to drive incremental lending on behalf of credit unions Claims processing – how do we increase straight-through claims processing to solve member problems, increase CU loyalty and reduce operating costs

Vehicle Sales over17 million in 2018 Currently making significant investments in data & analytics infrastructure. Some insights generated through this expanded capability will be shared with CU customers. Examples of some early data experiments that could benefit CUs: Loan generation – can credit bureau data be used to drive incremental lending on behalf of credit unions Claims processing – how do we increase straight-through claims processing to solve member problems, increase CU loyalty and reduce operating costs

Home Sales will Accelerate to 5.5 million in 2018 Currently making significant investments in data & analytics infrastructure. Some insights generated through this expanded capability will be shared with CU customers. Examples of some early data experiments that could benefit CUs: Loan generation – can credit bureau data be used to drive incremental lending on behalf of credit unions Claims processing – how do we increase straight-through claims processing to solve member problems, increase CU loyalty and reduce operating costs

The Dollar is Rising

Oil Prices are Falling

High Stock Prices Producing “Wealth Effect” among High-Income Households

High Stock Prices Producing “Wealth Effect” among High-Income Households

High Stock Prices Producing “Wealth Effect” among High-Income Households

Home Prices will Rise 6% in 2018

Household Financial Assets are Rising

Non-Financial Assets are Rising

Household Balance Sheets Are Healing

Household Balance Sheets Are Healing

Confidence at 17 year Highs

Confidence at 17 year Highs December 2000

Optimism:

Optimism: sustained low gas prices

Optimism: sustained low gas prices low interest rates

Optimism: sustained low gas prices low interest rates low retail inflation

Optimism: sustained low gas prices low interest rates low retail inflation rising stock and home prices

Optimism: sustained low gas prices low interest rates low retail inflation rising stock and home prices labor market at full employment & rising job openings

Optimism: sustained low gas prices low interest rates low retail inflation rising stock and home prices labor market at full employment & rising job openings low debt burdens

Optimism: sustained low gas prices low interest rates low retail inflation rising stock and home prices labor market at full employment & rising job openings low debt burdens improving credit availability

Optimism: sustained low gas prices low interest rates low retail inflation rising stock and home prices labor market at full employment & rising job openings low debt burdens improving credit availability tax cuts.

Pessimism:

Pessimism: worries over pace of job growth

Pessimism: worries over pace of job growth political uncertainty, dysfunction and gridlock

Pessimism: worries over pace of job growth political uncertainty, dysfunction and gridlock slow wage growth

Pessimism: worries over pace of job growth political uncertainty, dysfunction and gridlock slow wage growth fears of financial market bubbles (i.e. non investment grade corporate bond market)

Pessimism: worries over pace of job growth political uncertainty, dysfunction and gridlock slow wage growth fears of financial market bubbles (i.e. non investment grade corporate bond market) Trade war rhetoric

Pessimism: worries over pace of job growth political uncertainty, dysfunction and gridlock slow wage growth fears of financial market bubbles (i.e. non investment grade corporate bond market) Trade war rhetoric Real war rhetoric

When is the Next Recession?

Borrowing future income for current consumption

Borrowing future income for current consumption Saving current income for future consumption

Banks have always depended On a rate of borrowing that is splendid Limerick of the Day Banks have always depended On a rate of borrowing that is splendid By consumers for whom Their means to consume May soon find them overextended.

Questions?

The End