While the U.S. economy had an uneven first-quarter performance—particularly a 0.2% decline in gross domestic product—the underpinnings of the U.S. economy are solid.
That was the consensus during a recent meeting of CUNA and CUNA Mutual Group economists to update credit union and economic forecasts for 2015 and 2016.
The U.S. economy is expected to grow 2.20% in 2015 and 3.25% in 2016 as higher employment and improved consumer and business confidence boost demand and output.
Challenges remain, however.
Pockets of weakness in the global economy, including slower growth in China and Japan, will continue to affect the U.S. economy. And developments in Greece are a key concern.
Headline and core inflation (excluding food and energy prices) will stay near 1.50% and 1.75%, respectively, in 2015 as the economy continues to expand against the backdrop of oil prices remaining below historic highs.
An uptick in headline inflation is in the offing for 2016 as the economy inches toward full employment, fueling both overall spending and wage pressures. Still, headline inflation will remain below the Federal Reserve’s target of 2%.
The labor market, while not completely healed, is reflecting broad improvement. The unemployment rate will end 2015 at 5.20% and should settle at 4.90% by year-end 2016.
While a federal-funds rate hike this year may have a significant “announcement effect,” market participants have been planning for a rate hike for some time. Any market disruptions are expected to be minimal and temporary.
We predict the fed-funds interest rate will increase to 0.50% this year and to 1.75% next year as the economy continues to strengthen, we approach full employment, and inflation expectations mount. Fed actions will continue to be data-driven and measured in an effort to limit market shocks.
This will affect credit union earnings. Interest margin pressures will become more obvious in 2016 and mortgage refinancing will decline. We expect the return on average assets to decline slightly from 0.80% in 2014 to 0.75% this year, then dip to 0.70% in 2016.
The Treasury yield curve will flatten in both 2015 and 2016 as short-term interest rates rise faster than long-term interest rates. This will begin to squeeze credit union net interest margins as borrowing short-term and lending long-term become less lucrative.
Still, credit union yields on assets will rise in 2015 due to rising interest rates and faster loan growth.
Other predictions for credit unions:
The first quarter clearly reflected transitory weakness.
Although we expect credit union earnings to be lower in 2015 and 2016 relative to 2014, the net effect of continued economic expansion on credit unions will definitely be positive.
PERC PINEDA is CUNA’s senior economist. Contact him at 608-231-4285 or at firstname.lastname@example.org.