PHOENIX (11/7/13)--Credit Union National Association Senior Economist Mike Schenk joked that each time he addresses the CUNA Lending Council's annual conference, he has better and better news.
|Lenders will feel added pressure to boost interest margins in 2014, and new-auto loans will be a sweet spot for credit unions next year, said Mike Schenk, vice president of economics and statistics at the Credit Union National Association, Tuesday at the 19th Annual CUNA Lending Council Conference in Phoenix. (Photo provided by CUNA)|
It was no different Tuesday at the 19th annual CUNA Lending Council Conference in Phoenix, although there's still room for improvement.
Most business leaders believe the economy is improving, he said. But a recent Gallup survey found that only 33% of consumers believe that's the case--and 62% believe the economy is worsening.
"That's a shocking statistic 52 months into economic recovery," said Schenk, CUNA's vice president of economics and statistics.
This consumer pessimism and other indicators, namely slow economic growth and stubborn unemployment, point to a "slow and unsteady recovery," Schenk said.
He cited three key issues affecting the economy:
1. We haven't reached our key economic goals. The economy is limping along at a 2.5% growth rate versus historical growth of 3.25%, and growth is likely to decline during the third quarter.
The unemployment rate remains at 7.2%, lagging the traditional long-term average of 6.5%. While there have been job gains, they're relatively weak: 148,000 new jobs were created in September, not enough to lower the unemployment rate. Schenk estimated there are two million fewer jobs today than in 2007. He says the labor market should be at normal employment by the third quarter of 2014.
2. Persistent weakness. Gross domestic product (GDP) growth normally would be 4.3% three years after a recession, but it lingers at 2.4%, Schenk said. That's largely because the economy is entering the third phase of deleveraging since the Great Recession. This first phase was businesses deleveraging, followed by consumer deleveraging. "Consumers represent 70% of our economic activity, which is a huge drag," Schenk said. The good news: Consumer deleveraging is ending. The bad news: Federal government deleveraging is just beginning--and will take 1.5% of the nation's economic growth with it.
Other potential land economic landmines include the possible scaling back of the Federal Reserve's quantitative easing program, and the prospect of continued debt ceiling fights, which could have serious consequences, Schenk said. "These multiple hits are having a dramatic effect on peoples' outlook and willingness to spend money," he said.
3. There are positive economic signs. The economy continues grow, albeit slowly, and "there's no inflation in sight," which is good for short- and long-term interest rates, he noted.
Consumers are holding steady on employment and income, and there's pent-up consumer demand, especially in auto sales. "That should be a sweet spot for credit unions," said Schenk. "The average age of cars on the road is almost 11 years."
Plus, housing prices are on the rebound, having risen 4.4% year-to-date, and many consumers have benefitted from large stock market gains. "This improves consumer spending," as does consumer deleveraging, he said.
There also are positives for credit union lenders, such as vastly improved asset quality, high earnings despite low net-interest margins, and strong membership growth (2.1%).
"It's clear that consumers are discovering and appreciating the credit union difference," Schenk said.
Despite tepid overall loan growth, Schenk said there will be dramatic improvements in new- and used-auto lending.
But credit union lenders will feel the pressure to improve net-interest margins as noninterest income declines. "The pressures put on you will become more dramatic," he warned. "Going forward, the return on assets of 84 basis points in 2012 will be a high watermark.
"Overall, it's good news," Schenk continued. "We're almost there. The future looks brighter now than it did a year ago."