Five years ago, it seemed a new, never-before-seen tech gadget landed in stores every month–a phenomenon that served as a serious boon for economic growth. Five years later, we’re still waiting for the next big thing, and, frankly, so is the economy.
Advances in information technology allow us to communicate faster, simplify business processes and transactions, and convert billboards and advertising electronically to entice more consumption. Yet, there seems to be shortage of innovation – particularly in merchandise – that has stalled discretionary consumption. In other words: Retail sales could use a boost.
Here at CUNA, we recognize how the recent dearth of innovation combined with pesky downward wage pressures have put a crimp on U.S. economic growth, and how this might affect the bottom lines of credit unions across the country.
The Decelerating Recovery
While America has effectively recuperated from the Great Recession, growth rates that we would call “healthy” remain fairly elusive. That’s because business investment spending, which fuels innovation, has remained low and household consumption has been tempered due to slow wage growth. U.S. real gross domestic product (GDP) annual growth has averaged 2.6% since 1980, but since the Great Recession, our economy has only expanded by 1.5% to 2.5% – a direct product of a lack of innovation and tepid economic activity. If GDP is going to climb back to 2.6%, consistent and higher investment spending and higher consumption must take place.
Meanwhile, as we approach full employment, job growth will begin to sag, and largely because confidence in the market will encourage more Americans to hop off the sidelines and join the workforce. As a result, delinquency rates at credit unions should continue to slide, affecting noninterest income, but ultimately credit union loan portfolios would benefit from a rebound in job growth.
Credit unions also should keep an eye on how well the dollar holds its value. We expect inflation to pick up later this year, but a fading dollar value coupled with an overall rise in commodity prices would lead to higher operational costs at credit unions and chip away at loan revenues.
More moderate economic growth, as we have experienced of late, means fewer interest rate increases by the Federal Reserve. Accordingly, we lowered our projections in our latest economic forecast, and now expect only two increases this year, with the federal funds rate finishing 2016 at roughly 0.90%.
For credit unions, the ebb and flow of savings rates and loan growth will prove challenging. Savers save less when rates are low, while borrowers borrow less when rates are high. Look out for a firm signal from the Federal Reserve that it will move further from a near-zero interest rate to an interest rate that supports an economy at full capacity.
The Good News? Credit Unions are Staying Strong
Despite more moderate economic expansion, credit union savings, loan, asset and membership growth in the first quarter all outperformed our first quarter projections. Still, with two expected rate hikes from the Fed on the horizon, we expect savings growth to fall short of last year’s levels.
Interest rates have risen more slowly than expected after the Fed’s first rate hike in December last year, and the anticipated transfer of funds to money market mutual funds has not materialized. Still, we expect a modest rebalancing of funds to investments with higher rates of return as the Fed continues to raise short-term interest rates. Moreover, savings growth, fueled by last year’s low gas prices, will disappear as the price of oil continues to climb.
Credit union loan-to-share ratios are also solid, indicating a healthy use of credit union resources. We might see a slowdown in savings, but the strength of credit union loan portfolios should balance out earnings. We project a negligible 0.05% decrease in earnings for 2016 and 2017.
Impressively, membership growth should just about keep pace with last year’s blistering rate – slowed slightly by a small step back in indirect auto lending and higher interest rates. But the still-healthy membership growth has prompted us to raise our loan growth projection a full percentage point to 10%.
What to Look Out For
The Fed appears content – for now – to sit tight on the federal funds rate, but when it decides to begin nudging rates higher, net-interest margins are sure to narrow, likely taking a bite of your earnings. Credit unions should also keep tabs on any overfunded loan-loss allowance accounts. We’re expecting loan-loss provisions to drop and funding costs to rise in 2016, a development that will pare down credit union returns on assets (ROA).
CUNA’s economic forecast will next be updated in June incorporating first quarter GDP and other macroeconomic data, which will provide further clarity on the state of credit union operations. So mark your calendars, and don’t forget about our monthly CUNA Economic Update video series.