As of September, 2013
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- The U.S. economy is expected to grow 2.00% in 2013 and 3% in 2014. The U.S. economy will grow 2% in 2013 due to surging housing construction, rising home prices, rising auto sales, stronger business investment spending and a robust energy sector. Fiscal headwinds coming from higher payroll and income tax rates and lower government spending due to the sequestration will be a modest drag on overall economic growth but not enough to derail the recovery.
- Inflation will fall below the Federal Reserve’s inflation target of 2% in 2013. Core inflation (excluding food and energy prices) will also remain around 1.75% in 2013 due to a modest recovery and falling commodity prices. Low core inflation will keep inflation expectations low and therefore also keep long-term interest rates low.
- The unemployment rate will fall below 6.5% by the end of 2014. The 6.5% is the new threshold the Federal Reserve has adopted as to when it will begin raising the fed funds interest rate target. The higher than normal unemployment rate over the next two years will keep CU loan delinquency rates slightly above historical averages.
- The fed funds interest rate will stay in the 0-0.25% range through 2014 due to the economy operating below potential. The U.S. economy is currently producing a level of output of goods and services 6% below its potential level of output. The Federal Reserve will wait until the economy closes that gap before exiting its extraordinarily easy monetary policy.
- The 10-year Treasury interest rate will move in the 2.75% to 3.25% range through 2014. The Federal Reserve’s QE-3 program (monthly purchases of $85 billion of Treasury bonds and MBSs) will continue through 2013 to keep downward pressure on long term interest rates. The quantity of purchases will decrease in 2014 as economic growth reaches 3%. This will raise long-term interest rates to over 3.25% by year-end 2014.
- The Treasury yield curve will steepen in 2013 and 2014 as long-term interest rates rise faster than short-term interest rates. This may increase credit union’s net interest margins as borrowing short term and lending long term becomes more lucrative; but only if loan demand is there.
CREDIT UNION FORECAST
- Credit union savings balances are expected to grow 5% in 2013 and 5% in 2014. Saving growth will remain below the average growth rate over the last 20 years of 6.7% as the economic recovery encourages household to spend rather than save. Fast membership growth of around 2.25% (twice as fast as the 1% growth in population ) will help buoy savings growth.
- Credit union loan balances are expected to rise 5.5% in 2013 and 6.5% in 2014. We expect households to release some pent up demand for autos, furniture and appliances over the next 2 years. New auto loans, credit card loans and purchase mortgage loans will be strong growth areas.
- Credit quality will improve in 2013 and 2014. The overall loan delinquency rate will fall below 1% in 2013, the lowest level since July 2008, as job growth continues. Provisions for loan losses as a percent of assets will fall to 0.30 percent in 2013, below the 0.43% recorded in 2007.
- Credit union return on assets will fall to 0.78% in 2013 and move up to 0.8% in 2014. A 10 basis point decline in net interest margins will be only partially offset by a 5 bps decline in provisions for loan losses. Fee and other income will decline as the mortgage refinance boom comes to and end in 2013.
- Capital-to-asset ratios will rise to 11% in 2014. Capital growth will outpace asset growth over the next two years, increasing the capital-to-asset ratio. Credit union capital ratios will approach the record level of 11.5% set in 2006, the year before the beginning of the great recession.