While the economic recovery likely will remain on track, CUNA’s economists now expect marginally slower economic growth.
Based on an economic forecast performed after the second quarter:
► Gross domestic product (GDP) growth estimates are down from an earlier forecast of 2.6% in 2012 and 3% in 2013 to 2% and 2.5%, respectively. These changes reflect increasing consumer caution because of the softer-than-anticipated labor market recovery and increasing uncertainty surrounding the Eurozone crisis and U.S. budgetary issues.
► The unemployment rate likely will decline as employers increase hiring faster than new entrants come into the labor force. But the unemployment rate will remain elevated and will improve only marginally during the next 18 months. The unemployment rate should average 7.75% in 2013—a bit higher than CUNA’s previous 7.5% estimate.
► Low income growth and cautious consumption expenditures will result from this slower labor market improvement and nagging uncertainty. Changes in headline inflation, as measured by the Consumer Price Index (CPI), likely will be less pronounced than previously thought. CUNA now expects headline CPI to increase 1.75% in both 2012 and 2013 (down from the previous 2% forecast for each year). Core inflation (excluding food and energy prices) probably will fall below 2% in both 2012 and 2013, due to a slowing economy and decreasing commodity prices. Low core inflation will suppress inflation expectations and, hence, long-term interest rates.
► The Central Bank, with this backdrop, will keep the federal-funds interest rate target in the 0% to 0.25% range at least through 2013. Labor and credit market conditions will be the major factors influencing the Federal Reserve’s decision to increase interest rates. The Fed will wait until loan demand picks up and the unemployment rate falls before beginning its exit strategy from its historically unprecedented easy monetary policy.
► Longer-term rates are likely to increase (but with lower inflation) more slowly than previously expected. The 10-year Treasury rate should average 1.7% in 2012 and 2.25% in 2013—down from last quarter’s projection of 2.15% and 2.75%.
This changed view of the economy means credit union operating results will continue to improve—but at a somewhat slower pace than previously thought.
Shaky confidence and heightened uncertainty will mean slightly faster savings growth in the near term and slightly slower loan growth. Overall credit union savings balances are now expected to increase 6% in 2012—up from the previously anticipated 5% increase—as cautious consumers forego spending and borrowing.
Credit union loan balances should increase 3% in 2012 and 5% in 2013—down from earlier expectations of 4% and 6%, respectively. A weak job market will keep consumer confidence, spending, and borrowing relatively weak in 2012. But households undoubtedly will release some pent-up demand for housing, autos, furniture, and appliances. Auto loans, credit card loans, and purchase mortgage loans will be strong growth areas.
Credit quality will improve in 2012 and 2013. Overall loan delinquency and charge-off rates will fall as job growth continues. Provisions for loan losses as a percent of assets will fall to 0.4% in 2012—below the 0.43% recorded in 2007.
Lower loan loss provisions, marginally faster loan growth, and a lower NCUA stabilization assessment (expected to be 10 basis points this year) will boost net income in 2012. Earnings, while continuing to improve, should show a less pronounced increase than reflected in CUNA’s first-quarter forecast.
Credit union return-on-assets (ROA) averaged 0.68% in 2011, and CUNA projected an increase to 0.9% in both 2012 and 2013. The revised outlook calls for ROA of 0.8% in 2012 and 0.9% in 2013. Expect stronger earnings to help push the aggregate net worth ratio close to the prerecession record level of 11.5%. Capital-to-asset ratios should increase to 10.8% by year-end 2013.
For more information on these trends and forecasts, visit cuna.org/econ, and select “economic data.”
MIKE SCHENK is CUNA’s vice president, economics and statistics. Contact him at 608-231-4228.