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Could the GDP Be Wrong? An alternative indicator explains why By Ashley Bray, contributing editor
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s the Great Recession really over? Generally speaking, the start or end of a recession is defined by two consecutive quarters of GDP decline or growth. Economists also study other leading indicators, such as the stock market, as well as lagging indicators, like the unemployment rate. Going by GDP numbers, the last recession started in December 2007 and ended in June 2009. Mike Moebs, economist and CEO of Moebs Services in Lake Forest, Ill., a company providing research, consulting, and training for banks and the government, is introducing a new indicator in 2017—Transaction Account Metrics (TAM). He believes these metrics show, from the consumer’s point of view, that the Great Recession never ended. “If consumption drives over 70% of the economy, then measuring the consumer’s checking account balance would measure the consumers’ activity,” he states. TA M is built on average checking account balances in the Federal Reserves’ Flow of Funds Report, Z1, and the one million checking accounts Moebs tracks (it is not a statistical sampling). Although the accounts tracked a re consumer checking accounts, the data will include some embedded small business checking balances because some businesses represent themselves as consumers. The information the company has tracked covers the early 1990s up until today, and Moebs believes it’s a good indicator of the state of the economy and consumer activity. “There are very few
$7,000
Average Consumer Checking Balance
$6,000 $5,000 $4,000 $3,000 $2,000
Avg. since early 1990s
$1,000 $-
2007 2008 2009 2010
2011
2012 2013
2014
2015 2016
Source: Federal Reserve & Moebs Services
consumers who are going to be dealing day-to-day with ordinary things in life that don’t have some type of transaction account,” he says. From the TAM data, Moebs has found that the average checking account balance since the early 1990s is about $2,000. In good times, the balances are lower—for example, $700 in 2007, right before the recession hit. “The consumer has enough confidence that they don’t have that much money in their checking account. We also find that in good times, there will be more errors, overdrafts, that are made,” says Moebs. “There is greater activity, greater volume when the balance is low.” However, in bad economic times, the balance rises, and it is currently at an alltime high of $6,535. With these higher balances, there is less activity. “Overall, I think what this is saying is we’re
still in a recession. The consumer isn’t back,” says Moebs, adding there won’t be a turnaround until there is a reduction in checking account balances, which likely won’t occur until the Fed raises interest rates and gets money stock back to normal levels. Once this happens, banks will begin to see money leave the accounts. Now, $1.8 tr i l lion is in check ing accounts, with about one-third ($694.1 billion) contributed by consumers. Moebs says 40% of that money will remain stable, but 60% ($414.1 billion) will move from checking accounts to other deposits or be used to pay down debts, etc. This movement is a ways off as the Fed has been slow to raise rates. This also means that to consumers, the recession will continue. “We’re going to have to see three or four quarters of reduction in these consumer DDA balances before we can truly say the recession is over,” says Moebs.
Takeaway from Wells Fargo: Bankers aren’t retailers
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fter the government’s $185 million settlement with Wells Fargo on Sept. 8 for faking account openings to up sales, U.K. fintech expert Chris Skinner addressed it on his blog, The Finanser. Here’s an edited excerpt: In the 2000s, U.K. banks became hard-core retail banks. They hired people from big retailers like Asda, now part of Walmart, and told staff to get out there and sell. In the last decade,
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BANKING EXCHANGE
U.K. banks sold payment protection insurance. If you borrow from the bank and lose your job, PPI will cover loan repayments until you find work. Result: Millions got PPI without knowing what it was; some because staff ticked the box without telling them; others because staff filled in applications and signed for customers after they left the branch. When the U.K. complaints authority saw a swarm of angry customers, it
October/November 2016
acted, stating that these activities were illegal and banks must pay back all premiums with interest if customers asked. That was in 2011, and, so far, that decision has cost U.K. banks $50 billion. Is this America’s PPI moment? I hope not. But remember, retail banking is not retailing. One lives with high risks whilst the other does not; mixing the two is dangerous. Read the blog at tinyurl. com/SkinnerWellsblog