News
CMG Economist Predicts Good Economic Outlook for Credit Unions Over Next Two Years — 8/18/17
Credit unions can expect the U.S. economic growth will remain above trend in 2017 and into 2018, said CUNA Mutual Group’s (CMG) director and chief economist Steven Rick. As credit unions continue to reap the benefits from this economic expansion, the next two years will continue to see a growth of up to 2.4 percent, he told attendees at CUNA Mutual Group’s eighth annual DiscoveryConference hosted online on August 17.
The Discovery Conference is the credit union industry’s
leading online conference hosted annually by CUNA Mutual Group for credit union
leaders.
“We continue to benefit from the second longest economic expansions in U.S.
history and credit unions have benefited from these tailwinds,” said Rick. “But
we should continue to expect to see the Federal Reserve raise interest rates in
the next year. We could also see a modest recession in 2019, due to a
short-term credit cycle recalibration, but this will not emulate the recession
we experienced in 2008.”
Will interest rates continue to rise?
Rick further explained that both long and short-term
interest rates will continue to rise over the next four years, as they start to
recalibrate to their natural rates, approximately 3 percent in short-term
interest rates and 4 percent in 10-year Treasury bond interest rates. This
recalibration will affect consumer spending in the coming years with consumers
looking to pay down debt and increase their savings due to higher interest
rates.
“As we slowly see interest rates rise, we see some changes in consumer
spending,” said Rick. “Although we saw an explosion of new car sales with
record sales reaching over 18 million new cars sold due to pent up demand,
sales will start to slow down through 2020.”
Rick states that financial institutions are tightening up their auto lending
requirements which is shifting lending to alternative outlets, like credit
unions. “Credit unions have seen almost a 17 percent growth in new auto
lending, particularly with indirect lending."
That is good news for credit unions looking to continue to grow in the coming
years, Rick adds.
Rick also discussed trends in home sales over the past two years. With first-time
home buyer demand accelerating, particularly in the millennial consumer
segment, mortgage lending continues to grow as consumers look to lock in
interest rates before the next rate hike. However, limited inventory in
available homes across the country will continue to cause homes prices to rise
between 4 - 5 percent through 2018. With this limited inventory of available
homes, Rick anticipates home sales will start to slow down in 2019 and
2020.
Where is the Fed headed?
Rick also discussed how these economic trends, interest
rates and consumer spending will affect credit unions over the next few years.
“We expect the Federal Reserve will continue to raise rates throughout 2018 to
manage the economic growth,” said Rick. “We’re forecasting rates will rise by a
quarter of a point through 2018. As the Fed funds rate increases to 3 percent,
credit unions cost of funds will also rise through 2021, to reach approximately
2 percent.”
Rick adds that credit unions’ yield to assets is currently the lowest in
history, at 3.5 percent, but as the 10 year treasury rate rise, credit unions’
yield on assets will rise. For most credit unions, the yield on assets will
increase faster than costs of funds, which will improve their bottom line,
mainly due to the repricing of short term assets, like home equity and credit
card loans.
“Lending is an important part of the credit union; we have continued to see
very strong loan growth in 2017 with four consecutive years of double digit 10
percent loan growth. We are forecasting a slowdown in 2018 to 7.5 percent and
to about 5 percent growth in 2020.”
Rick says that consumers will start to pay down their debt and credit unions
will see about 4 percent loan growth due to that trend. In addition,
there will be strong loan growth concentration in larger credit unions, as they
continue to offer multiple lending products to make up for the slowdown.
Key indicators to watch
Lastly, Rick outlined key indicators to watch within the
credit union industry. He states that while the industry continues to see
record credit union membership growth, membership will start to slow to 3 - 3.5
percent through 2018, due to slower job growth and slower lending trends. This
rate continues to outpace the natural growth of the U.S population.
The industry will also see fewer credit unions in 2017 with approximately a 3.5
percent credit union decay rate over the next four years, totaling
approximately 250 fewer credit unions each year. However, credit unions with $1
billion in assets or more are the fastest growing segment with large credit unions
experiencing record membership growth as well.
“Bottom line, the U.S. consumer is financially healthy, our economy continues
to see steady growth despite interest rates and lending slowdowns, we continue
to maintain record low unemployment, and home values starting to increase
again,” said Rick. “While these are all indicators that the economy is strong,
we need be mindful of 2019, with a potential recession, something to plan for
in the coming year.”
To learn more, watch Rick’s Discovery Conference breakout session, “The Economy
& Its Impact on Your 2018 Strategic Plan,” on-demand.
Discovery’s on demand sessions are available here
at no cost.
# # #