CUNA and CUNA Mutual Group economists recently met to update our 2015-2016 economic outlook. Our baseline forecast now calls for improved economic and credit conditions, leading to higher interest rates in both 2015 and 2016.
But credit union earnings, asset quality, and capital each should benefit.
While the U.S. economy is in good shape, the output gap—the difference between an economy’s potential output, measured by gross domestic product (GDP), and its actual output—has narrowed considerably but hasn’t closed.
Still, our forecast for GDP growth is 3% in 2015 and 3.25% in 2016. Higher employment and stronger consumer and business confidence will boost demand and output. Lingering weaknesses in some U.S. trading partners will keep the U.S. dollar strong, slowing exports and increasing demand for imports.
An uptick in inflation is in the offing for 2016 as the economy inches toward full employment, fueling both overall spending and wage pressures. But inflation is likely to remain below 2% through 2016, with headline and core inflation staying near 1.25% and 1.75%, respectively, in 2015.
The unemployment rate will finish 2015 at 5%, and should settle at 4.8% by the end of 2016. Monthly job gains will continue to move the unemployment rate lower, and concerns of labor underutilization will eventually dissipate. Importantly, these jobs will continue to shift from low-paying, entry-level positions to high-paying technical and specialized jobs in manufacturing and construction. Re-entry of discouraged workers into the job market will mean unemployment rate declines will not be as dramatic as those in the recent past. But overall job growth should be strong.
We expect the federal-funds interest rate to increase as the economy moves toward full employment and inflation expectations mount. But the Fed will act in a measured pace, avoiding a jolt in markets that have already strategized responses to a much anticipated interest rate hike. We expect the fed-funds rate to finish 2015 at 1%.
The 10-year Treasury rate will increase modestly this year and the next. The yield curve will flatten as short-term interest rates rise faster than long-term interest rates.
Continued improvement in the U.S. macro economy will result in more robust credit union lending. Fed tightening will put pressure on credit union net interest margins. But the benefits of faster loan growth likely will offset the challenge of higher market interest rates.
Our view is that return on average assets will be stable at 0.80% throughout 2015 and 2016.
Higher short-term interest rates also will slow savings growth to 4% in 2015 and 3% in 2016, as members rebalance their portfolios, transferring funds to money market mutual accounts. But with membership growth expected to continue at a solid 3% this year and next, saving growth should remain healthy.
We do not see an interest rate hike dampening loan growth. In fact, loan balances should increase 11% this year, up from 10.4% last year, as households continue to release pent-up demand. New-auto loans, credit cards, and mortgages will be strong growth areas.
As the job market continues to improve and loan growth accelerates, delinquencies should fall from 0.85% at the start of 2015 to an average of 0.75% in 2016. Net charge-offs will fall to an average of 0.45% this year and in 2016.
Strong earnings should mean capital growth will outpace asset growth. So expect credit union capital ratios to reach a record high of 11.2% in 2016, surpassing the previous record high last seen in 2005.
In sum, our forecast calls for faster economic growth this year and next, which should benefit both credit unions and their members. While there will be volatility along the way, one thing is certain: The U.S. economy today is in much better shape than it was five years ago.
PERC PINEDA is CUNA’s senior economist. Contact him at 608-231-4285 or at email@example.com.