2014 - 2015 Forecast
As of March, 2014
Get the number chart explanation of this forecast here.
The U.S. economy is expected to grow 3% in 2014 and 3.75% in 2015. The economic headwinds experienced over the last 5 years will abate and turn into tailwinds to push the economy's growth to over 3%. We expect a surge in housing construction, rising home prices, rising auto sales, stronger business investment spending and a robust energy sector.
Inflation will remain below the Federal Reserve's inflation target of 2% in 2014 and 2015. Core inflation (excluding food and energy prices) will remain below 1.75% in 2014 due to a large output gap and low capacity utilization rates. Low core inflation will keep inflation expectations low and therefore also keep long-term interest rates low.
- The unemployment rate will fall below 6.2% by the end of 2014. The Federal Reserve has set a 6.5% unemployment rate threshold for when it will consider raising the fed funds interest rate target. Even so we do not expect them to raise the fed funds rate in 2014. 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 4% 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 end 2014 below 3.3%. The Federal Reserve's QE program (monthly purchases of Treasury bonds and MBSs) will end in 2014 as the Fed reduces their monthly purchases by $10 billion at each of their 8 FOMC meetings. This will cause bond investors' demand for longer-term bonds to decline, resulting in higher interest rates.
- The Treasury yield curve will steepen in 2014 as long-term interest rates rise faster than short-term interest rates. This will increase credit union's net interest margins as borrowing short term and lending long term becomes more lucrative. Credit union yields on assets will rise in 2014 (reversing a 6 year decline) due to rising interest rates and faster loan growth.
CREDIT UNION FORECAST
- Credit union savings balances are expected to grow 3.5% in 2014 and 3% in 2015. Saving growth will slow to 3% in 2015 due to the Fed raising short-term interest rates which will cause some members to transfer funds to MMMFs. Nevertheless, 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 7.5% in 2014 and 8% in 2015. Loan growth of 7.5% will be the fastest pace since the 7.6% rate set back in 2007. Expect households to release 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 2014 and 2015. The overall loan delinquency rate will fall below 0.8 in 2015, but remain above the long-run average of 0.75%, as job growth continues. Provisions for loan losses as a percent of assets will rise above the 0.26% reported in 2013 as loan growth picks up.
- Credit union return on assets will rise 0.80% in 2014 and 0.85% in 2015. Rising yield on assets will increase net interest margins and the elimination of the corporate assessment will lower operating expenses. Nonetheless, a drop in mortgage refinancing will reduce "gains on sale of mortgage" income.
- 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