Economists See Reasons for Optimism

Economists recently updated their 2014 economic forecasts—and the news is good for CUs.

March 1, 2014

CUNA’s economists recently updated their forecasts for the economy and credit unions in 2014—and the news is good.

Credit Union Magazine asked Bill Hampel, CUNA’s chief economist, to discuss what’s behind the positive forecast.

Q: Why did you update your forecast? Have things changed that much since your last update in September?

A: We typically revisit this forecast every three to four months, so it was time. Also, some important things have happened since September, which alter our view of the future.

Most important, erratic changes in U.S. fiscal policy are much less of a threat to the economy than they were before October. The chances of another government shutdown or, even worse, a failure to raise the debt ceiling are dramatically diminished. That removes a huge cloud of uncertainty over the economy.

Q: So what has changed?

A: We’ve become a bit more optimistic. We now expect the economy to grow 3.25% this year—the best year since 2005—up from our previous forecast of 3%. This growth will be fueled by rising home prices, surging home construction, and strong consumer durable spending, especially on autos and healthy business investment spending.

With this stronger growth, we expect the unemployment rate to average 6.5% this year, down from our previous estimate of 7%. That means the unemployment rate will fall below 6.2% by year’s end, perhaps approaching 6%.

Q: Does that mean the Federal Reserve will start raising interest rates? Didn’t the Fed announce that a 6.5% unemployment rate would trigger a boost in the federal- funds rate?

A: Not quite. The Fed has made it pretty clear—as clear as a central bank can—that a 6.5% unemployment rate is a threshold, not a trigger for raising the federal-funds rate.

In other words, the Fed won’t raise interest rates until sometime after the unemployment rate falls to 6.5%. It will depend on what’s happening to inflation and how strong job creation is.

Q: Wait a minute. If the unemployment rate falls to 6.2% by the end of the year, doesn’t that mean job creation was really strong?

A: Not necessarily. If the growth of the labor force picks up steam, then a rapidly falling unemployment rate requires strong job growth. But if many people choose to stay out of the labor force, the unemployment rate could fall despite weak job growth.

If the economy can consistently achieve monthly job gains of at least 200,000, then we’re more likely to see the federal-funds rate increased soon after the unemployment rate falls below 6.5%.

Q: You also mentioned something about inflation.

A: Yes. We’ve reduced our forecast for inflation in 2014 from 2.25% to 1.75%. That will allow the Fed to wait longer before beginning to increase the federal-funds rate. That low inflation forecast would also keep the pressure off of longerterm rates.

Q: Have you made any changes to your CU forecast?

A: Yes, we’ve boosted our loan growth estimate from 6.5% to 7%, and lowered our savings growth forecast from 5% to 4%. Stronger consumer spending on durables has influenced both of these changes. And the continuation of very low short-term interest rates will continue to retard savings growth.

Q: How about CU earnings this year?

A: We’ve nudged our earnings forecast down from 80 basis points (bp) to 75 bp. This is the result of a number of off setting factors.

With stronger loan growth, net interest margins will finally begin to rise, if only modestly for now. Also, there’s almost no chance of either a share insurance premium or a corporate stabilization assessment this year.

On the negative side, revenues that result from mortgage refinancing will subside and credit union expenses will likely grow as they relax spending controls and rebuild some infrastructure after several years of extreme austerity. That’s not necessarily bad.

Q: That’s a pretty positive outlook for 2014.

A: You betcha. Who said that economics was the dismal science?

Find CUNA’s revised economic forecast online.