Credit union economists will convene in the coming days to update our baseline economic and credit union forecast.
Heading into that meeting here are my thoughts about the economy’s trajectory and implications for credit union operations and interactions with members.
Our current baseline forecast already reflects anxiety around weak economic growth—mostly due to the continuing impact of tariff policies. But the Iran war and closure of the Strait of Hormuz is now our primary concern and will naturally dominate the conversation.
The Iran War will lower overall economic growth in the short run and increase inflation pressures—keeping price increases front-and-center as a key concern—both for consumers and the Federal Reserve. It also may strain what now seems to be a fairly healthy job market.
The odds of recession—which we reduced from 35% to 25% in our first-quarter outlook—are likely to rise significantly. I expect those odds to come in close to 50% in the absence of significant positive movement toward resolution of the Iran conflict over the next few days.
Even if the war were to end soon, the likelihood of a long tail to “recovery” (or slow movement toward a pre-war norm) seems high. One key example: damaged fertilizer plants will require years to come back on line—with significant effects on the farm economy generally and on food supplies & food prices more specifically.
Spending on AI—most notably AI infrastructure has helped to buoy economic output in the face of tariff impacts. But current trends suggest a re-calibration of AI spending is underway—so those offsetting impacts are likely to fade.
The baseline outlook for overall GDP growth will almost certainly erode—perhaps nudging expected growth below 2% for the year.
On the inflation front, our first-quarter forecast had 2026 price increases easing and on a path toward the Federal Reserve’s 2% target. Not surprisingly, our revised outlook is sure to look a lot different.
West Texas Intermediate crude oil prices settled in at $104 per barrel heading into the Easter weekend and are up over 60% compared to the pre-war level.
More broadly, CPI inflation data scheduled for release on April 10th will likely reflect a whopping 1% increase in the CPI for March, mostly due to gas price increases of roughly $1 per gallon in the month.
Spillover effects and supply chain disruptions mean core CPI (excluding food and energy) are also apt to increase significantly. The consensus expectation reflects a 0.3% increase in the month—a 3.6% annualized advance.
The Fed’s preferred inflation measure—the Personal Consumption Expenditure Index (PCE)—will likely reflect a 0.4% increase (excluding food and energy). That’s a 4.8% annualized increase.
It seems possible our 2026 inflation forecast could rise from 2.5% to well over 3%.
Labor market news has been a bright(er) spot recently with first quarter data generally reflecting more resilience than observed when we met for our initial 2026 forecast back in January. Recently-released data from the Bureau of Labor Statics shows the unemployment rate holding steady near full employment—and job gains averaging 133,000 over the first three months of the year.
The data also shows average hourly earnings changes continue to outpace inflation—true in all but one of the 13 broad private sector groups tracked. That’s helpful, but not sustainable against the backdrop of the big price increases now being reported.
Uncertainty breeds market volatility and that’s definitely been the case over the past month or so: The S&P 500 fell nearly 4% between the start of the war on February 28th and April 2nd (the market close prior to the Easter holiday). Long rates are up and the 10-year treasury yield has increased by roughly 40 basis points over that period. The Fed has taken a more cautious stance and seems less likely to lower its benchmark Federal Funds interest rate target anytime soon.
The economic changes we’re seeing will undoubtedly translate to changes in consumer behavior—with implications for credit union operations.
We’re unlikely to build recession into our baseline outlook (which suggests we won’t be anticipating serious deterioration in asset quality).
But it DOES seem likely that consumer confidence—hence consumer spending and borrowing—will ease. A modest downward revision in overall borrowing expectations seems warranted (most especially in the mortgage arena). Loan growth expectations may dip below 5% (versus a 5.5% first quarter forecast and well below the 8% annual historical average.)
And while we see no signs of massive “flight-to-safety” flows, precautionary inflows into savings accounts will be more obvious. Something on the order of 7% now seems reasonable—which would be a full percentage point higher than our first quarter forecast and very close to the 7.4% credit union long-run annual average. In any case, expect higher savings growth overall.
The earnings and net worth outlook may be tweaked—but I foresee no big changes to the outlook for those KPIs.
In short, while there is a great deal of concern and lots of uncertainty at the moment, the economy is not—by any means—in “dire straits”. Knowing what we know now, credit union operations seem unlikely to be severely stressed.
Regardless of your outlook, now seems to be a good time to prepare for several uglier alternative scenarios.
