AN ECONOMIC OUTLOOK
Money Matters
By Keith Sessions, AMA Chief Financial Officer | keithsessions@hotmail.com
At the end of the first quarter of 2022, AMA’s membership numbers were slightly ahead of last year at that time, which is good news. They were slightly behind the membership goal, but we tend to see more renewals in the spring and early summer.
Expenses have been challenging with inflation and supply chain problems. Paper, in particular, has become a greater expense. Although it is still early in the year, we are making adjustments based on higher costs.
Last year, our insurance provider warned us that we were heading into a “hard” insurance environment. Many members mistakenly believe that the AMA acts as an insurance company. We do not. Instead, we purchase insurance through an outside company to provide this benefit to our members.
We have had an incredible run of safe flying and low claims for a number of years. Unfortunately, claims are only one part of pricing when it comes to premiums. The rising cost of goods and the replacement costs of those goods mean that expected claims will likely be more expensive. A decrease in the number of providers in a space decreases competition and increases prices.
Insurance companies also invest their premiums. Decreased capital-market assumptions mean that premiums need to increase. The bottom line is that we expect an increase across the board in expenses for the next couple of years.
The plan to address our situation is to control expenses, to the degree we can. As costs rise, we will renegotiate and shop anything and everything we can to cut costs. Income from membership dues appears to be on track with our expectations. If the economy worsens, I am concerned that this will decrease.
Non-dues revenue becomes much more important during these times. This includes revenue streams such as advertising, farming, and event fees. Donations are always welcome and encouraged. There are numerous ways to donate, and we are happy to discuss those with you.
It has been more than 5 years since our last dues increase, and 13 years before that increase. As of this writing, we are not discussing increasing dues.
How long will this economic environment last? I often hear this question in my professional life. There are many variables that can change the outcome—both good and bad.
The consensus is that Federal Reserve (Fed) action will take effect and inflation will taper. Inflation is a 12-month, backward-looking number. Think of it as a year-over-year measurement. This means that Fed action can take a while to show up in the inflation numbers.
As of this writing, the Fed has stopped the asset purchase program of $120 billion a month in treasuries and mortgages. We have seen this impact the market, with the 10-year Treasury bond yield moving from a low point slightly more than 2 years ago of 0.54% to roughly 2.74% as of this writing. The 30-year mortgage rate went from an average low of 2.65% to more than 5% now. Combined, this makes it more expensive to borrow money for projects or home purchases and will cool off the markets.
The Fed moved the short-term rates by 0.25% in March, and a 50 basis points (BPS) move is expected in May. The BPS is commonly used for calculating changes in interest rates, equity indices, and fixed-income security yields. This will increase short-term rates and loans that are tied to variable indicators, such as prime rates.
The Fed has plans to start shedding another $93 billion in assets (e.g., bonds) each month, which should further increase interest rates. These actions eventually flow into the data that derives inflation. Because inflation is year over year, it takes a while to see the results. The expectation is that the growth seen in housing, used car prices, etc., will not grow as fast and could even decrease.
Wages, a key metric in inflation, will probable remain higher and could increase. The Fed’s target for inflation is 2%. The expectation is that we will see that number again and not go through a late 1970s/early ’80s economy.
As mentioned, there are a lot of variables that can change the outcome.
