By Ray Birch
MADISON, Wis.—If the partial government shutdown has demonstrated anything, it’s made clear just how many Americans lack any savings for a rainy day and live paycheck to paycheck. It’s also revealed an opportunity for CUs to “distinguish” themselves, according to sources who spoke with CUToday.info.
All of the earlier surveys and research showing three-fourths of Americans live paycheck to paycheck have been made very real by the plight of many among the 800,000 federal workers who have missed their first paycheck. Should the shutdown drag on, sources indicated, it will become more than a problem for members, but also for CUs as increasingly stretched credit cards are maxed out and delinquencies rise.
Gigi Hyland, executive director at the National Credit Union Foundation, pointed to data that show the gravity of the situation facing many Americans.
“We know 800,000 federal government employees are furloughed,” said Hyland, citing Careerbuilder.com 2017 data that reveals 78% of U.S. workers live paycheck to paycheck. “If we use that statistic, 624,000 will struggle mightily with not receiving a paycheck due to the shutdown.”
What the Data Show
Hyland dug into the Careerbuilder.com data to show those who live paycheck to paycheck are not just low income:
- Nearly one-in-10 workers making $100,000 or more live paycheck to paycheck
- More than one-in-four workers do not set aside any savings each month
- Nearly three-in-four workers say they are in debt today—and more than half think they always will be in debt
- More than half of minimum-wage workers say they have to work more than one job to make ends meet
Gigi Hyland
“We know more than three-fourths of the population lives paycheck to paycheck, agnostic of income level,” said Hyland. “That means everyone needs to think about saving more to weather any type of emergency, be it a government shutdown or a medical emergency.”
Hyland looked closely at what types of expenses consumers may struggle with most, and those that will be set aside.
“Everyone’s financial life is unique, but mortgages, car loans, other loans, credit card bills, and regular monthly bills—such as utilities, condo fees, cable, etc.—are probably the first to be affected,” she said. “However, buying groceries, gas for the car or transportation passes for the bus, and daycare costs are also on the line when people rely on their paycheck coming in every two weeks. Another very real impact can be deferring regular healthcare, like dental visits, annual checkups, mammograms…”
Hyland said the Foundation is partnering with credit unions to assist affected members. CUToday.info has extensively reported the number of credit unions that are stepping up to help impacted members, with low rate loans, loan deferrals and more.
https://www.cutoday.info/THE-feature/More-Than-50-CUs-Offering-Special-Assistance
“Every credit union can do something to help with this situation,” said Hyland. “Find out which members are impacted by the furlough. Reach out to them and see if you can help. The Foundation continues to serve as a resource to connect credit unions to a variety of other community organizations in their area who are trying to assist furloughed employees and their families. We also continue to emphasize how important it is to put members’ financial health at the center of a credit union’s strategy. Credit unions’ response to the shutdown is more proof of the credit union difference.”
Financial Health Matters notes that 56% of U.S. consumers have less than three months of income saved. Sources who spoke with CUToday.info said that could place a lot more families in hardship if the shutdown lasts for an extended period—as President Trump has suggested it might.
Potential Career Changes
Jill Gonzalez, analyst for Washington-based WalletHub, thinks a protracted shutdown will lead to leaner retirement savings and temporary career changes for some.
“Some are doing everything from driving for Uber part-time or dipping into retirement savings. The longer the shutdown continues, the harder it will get for them to cope and maintain their ordinary lifestyle," Gonzalez said.
As data show, most Americans don’t set money aside for emergencies, she noted.
“As seen in our recent study, the share of Americans with rainy day funds varies widely depending on the city, and it can range anywhere from 35% to 76%,” said Gonzalez. “Those without emergency funds will have to rely on credit cards and rack up debt they might not be able to pay on time."
As CUToday.info previously reported, WalletHub has published one analysis expressing serious concerns about mounting credit card debt. Last summer the company reported consumers had surpassed $1 trillion in credit card debt for the first time, averaging $8,166 in monthly household debt. That’s just $300 away from reaching an unsustainable level, according to WalletHub.
"People's lives are affected by the shutdown both financially and socially. Even the most basic things are impacted, like grocery shopping,” she said. “In terms of financial services, banks, credit unions and insurance companies will also feel the effects of the government shutdown sooner or later. This will happen if people become delinquent on their loans, mortgages or credit card bills."
Bill Handel
‘The Pain Will Be Real’
In Lombard, Ill, Raddon VP of Research Bill Handel said discretionary spending will be first to go before real trouble sets in.
“So less spending at restaurants, on entertainment, etc.,” Handel said. “As the shutdown continues, then more significant issues begin to surface—delinquent credit card, loan and mortgage payments, for example. Again, while the impacted group is not unusually large, for them the pain will be real, and they run the risk of losing homes or cars, as well as having tarnished credit scores. One thing that financial institutions might choose to do, especially credit unions with a large proportion of government workers in their base, is to extend loan terms or offer programs such as skip-a-pay in order to reduce the strain. It would also make sense to offer financial counseling services.”
Handel thinks the shutdown presents an opportunity for credit unions to stand out by addressing a big problem the shutdown exposes.
“Several recent studies have queried on the ability of a consumer to deal with a $500 emergency need—typically, 40% or less are able to handle this emergency via savings they have accumulated,” said Handel. “It points out the bigger issue that this country faces—the lack of financial acumen and preparedness. This represents an opportunity for a financial institution to begin distinguishing itself from its competition.”
Opportunity for Differentiation
By increasing financial literacy efforts, Handel contends credit unions will distinguish and differentiate themselves.
“Raddon studies, and others, have shown the beginnings of a generational shift in regard to financial literacy,” noted Handel. “Millennials, and more particularly Gen Zers, seem to be more concerned with making better financial choices. Financial literacy is a vector credit unions should seek to differentiate on.”
If the shutdown lasts for a significant period, the economy will suffer long-term effects, predicted Gonzalez.
“It will mostly be impacted by the drop in consumer spending, but things like investments or real estate will be affected as well. However, this depends a lot on whether or not government employees will be paid the salaries owed during the crisis," she said.
Handel insisted the macroeconomic impact of the shutdown will likely not be large.
Michael Moebs
“Again, not all government employees have been impacted. However, if this were to drag on for a longer duration—say, several months—then the economic impact could be more severe,” offered Handel. “The biggest risk economically is that we are already at a seeming point of inflection in terms of consumer and business confidence, and this could be another contributing factor to drive the U.S. towards recession. It would not be the cause of recession, but could be a minor factor.”
For the credit union industry, the impact will be “spotty,” said Handel.
“Credit unions that have a large base of government workers could be more significantly impacted, experiencing rising loan delinquencies and charge-off activity,” he said. “For these credit unions we might see a reduction in ROA in 2019.”
Now is the Time to ‘Step Up’
Michael Moebs, economist and CEO at Moebs $ervices in Lake Forest, Ill., said predictions that the shutdown reduces GDP by one basis point each day it lasts are not accurate.
“The federal government shutdown so far has not had much impact on the economy. Many economists are predicting the shutdown will likely last until about the Super Bowl in early February. Also, economists are saying the shutdown is having about a 0.01%-a-day negative effect on GDP. My forecast is the shutdown will hit GDP less, no matter how long it lasts. Plus, with President Trump’s position of tying border wall issues into the budget, this could either be settled very quickly with a presidential emergency executive order, or continue into the second quarter of this year or longer.”
Some federal agencies have their funding in place, such as the Labor Department, while others, like the Commerce Department, are short on funding, noted Moebs.
“Yet, the Labor Department recently reported unemployment claims were for only 4,000 total federal workers,” he said. “This is well less than one-basis-point effect on GDP, or other macro-economic measures. Federal workers in the case of a government shutdown can get unemployment compensation, but must return all of the money if the shutdown is ended.”
Moebs recognized credit unions for the support they give to members in difficult times, encouraging more to provide unsecured lending at a low cost to members hit hard by the shutdown.
“Now is the time for credit unions to step up to the plate and hit a home run in the classical credit union spirit of people helping people,” said Moebs.