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Document Sample
CUNA Marketing & Business Development Conference
Gaylord Opryland Resort & Convention Center
Nashville, TN
Monday, 10:30-11:45 am, March 17, 2008
Marketing,
Business Development
& the Economy:
What it Really Means to You
Steven W. Rick
Senior Economist
Credit Union National Association
PO Box 431
Madison, Wis. 53701, USA
Telephone: 608-231-4285 Facsimile: 608-231-4924
E-Mail: srick@cuna.com
Recent Economic Trends
1. Two fears hang over the U.S. economy, wrenching recession
and spiraling inflation
2. The deleveraging and reckoning process has begun
3. The Federal Reserve is easing monetary policy to liquefy the
banking system and monetize the recession
4. The subprime credit crisis is spreading to many credit
markets
5. The housing market is in a severe meltdown
6. Falling home prices will restrain consumer spending
7. A weaker dollar and strong overseas growth will keep export
growth strong. The global trade imbalance correction has
begun
8. Rising energy prices has created a negative real income
effect for consumers
9. The government has passed a questionable stimulus plan
10. Households have a near zero savings rate
11. Capital funds now flow from poor to rich countries
Long-term Economic Trends
1. China’s entry into the global economy will have profound
effects on inflation, wages, and interest rates for the next 50
years.
2. World economy is becoming less dependent on U.S.
economy
3. Massive U.S. current account deficits => question of
America’s foreign borrowing sustainability
4. Massive U.S budget deficits
5. Worldwide savings and investment patterns must shift
towards a healthier balance
1
CU Balance Sheet
(% of Assets)
Assets Liabilities + NW
Cash (1%) Deposits (84%)
Share Draft (10%)
Investments (25%) Regular Share (23%)
06 07 08 MMA (15%) 06 07 08
5.1 6.1
Loans (70%) -2.4 5.4
CDs (29%)
Consumer (30%) IRAs (8%) 06 07 08
Mortgage (36%) 5.0 35.0
Business (4%) 06 07 08
Borrowings (4%)
8.5 7.5
06 07 08
9.0 7.1
Building (4.6%) Net Worth (11.4%)
06 07 08 06 07 08 06 07 08
5.52 5.89 2.35 2.78 3.17 3.10
YOA - COF = NIM 06 07 08
+ Fee/Other Inc. 1.29
06
1.36
07 08
- Operating Exp. 3.33 3.38
06 07 08
- PLL 0.31 0.43
= Net Income
06 07 08
0.82 0.64
*Required ROA = Growth Rate x Capital Ratio
(dependent variable) (choice variable) (current)
2
Savings Distribution
U.S. Credit Unions
60
50
40
30
20
10
0
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Regular Shares Certificates Share Drafts
Source: CUNA & NCUA. MMAs IRAs
Loan Distribution
U.S. Credit Unions
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Credit Card/Unsecured Auto Loans
Source: CUNA & NCUA.
HELOC/2nd Mortgage 1st Mortgage
3
Net Interest Margin vs Operating
Basis Points Expense to Average Assets
425
408
398 397
394 393
400 392
389
386 385
391
381
377
371
375 361
358
350 338
331
339 321 338
325 329 331 332
335 316
331 333
310
323 325
319 319 317 319 320
314
300 307 306 305
301
275
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
NIM Operating Expense
Net Interest Margin
1981-2007
540
520
The Credit Union Challenge:
500
Maintaining Net Interest Margins
480
460
Basis Points
440
420
400
380
360
340
320
300
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
NIM
4
Existing Home Market
(state of disequilibrium)
Median Home Price
($ thousands)
•Low pent up demand • foreclosed houses
•Fewer investors •Expected lower future
•Tighter underwriting home prices
•Higher interest rates
•Expected lower future S06
home prices S08
$222
Sticky prices in SR => Inventory
(overhang)
Market
Correction
$211 Market
Market clears bottom D06
in the long run
D08
6,100 6,510 # of Houses
(thousands)
Demand Side Supply Side
•Emerging countries' •Nearing “Peak Oil” (2007-2014)
economic growth •Geopolitical supply disruptions
•Depreciating dollar •Technological innovation
•Oil as an investment •Fewer new big discoveries
•State-subsidized gas • ¾ controlled by inefficient
•Falling substitute prices state-owned oil companies
•Inventory-disciplined OPEC
$ Price
Oil Market
Of Oil (Daily Volume)
S07
S08
Demand
$100 growing faster
than supply
$55
D08
D07
83 85 Barrels of oil
(Millions)
6
Economic Growth
Point
1. The U.S. economy is able to absorb many shocks (falling stock
prices, accounting scandals, rising energy prices, wars, terrorist
attacks) and continue to grow
2. Productivity growth reflects strong economic fundamentals
3. Falling dollar will increase in net exports.
4. The supply side tax cuts in June 2003 (lower marginal income tax
rates, and lower dividend and capital gains tax rates-15%,) are
stimulating work and investment
5. Profits per unit of GDP was the highest in 4 decades because of
recent restructuring and cost saving initiatives.
6. Firms have a lot of cash but will only invest if expectations of
economic growth are robust
Counter Point
1. The U.S. economy will be in recession for the 1st half of 2008,
maybe longer depending on the effectiveness of the stimulus plan
2. Growth will be below long-term sustainable (potential) rates for an
extended time due to slowing housing and manufacturing.
3. State and local governments face lower sales and property tax
revenues which will constrain spending.
4. Weak housing construction will shave 0.5% off GDP growth
5. Falling home prices will decrease home equity borrowing and
consumer spending.
6. A weak auto market will encourage production cuts
7. High consumer spending and low savings is unsustainable
8. The trade deficit forms one of the biggest downside risks to the
economy, reaching 6.6% of GDP or $873 billion. Therefore the
U.S. economy is highly dependent on inflows of foreign savings.
Foreigners may reduce lending to U.S.
9. Recent low interest rates => misallocation of capital towards
housing => lower economic growth.
7
Annual % Change in U.S. Economic Output
(Real GDP - Chainweighted 2000$)
5%
4.4%
4.3%
4.0% 4.1%
3.9%
4% 3.8%
3.7%
3.6%
3.4%
3.3%
3.2%
3.1% 3.1%
2.9%
3% 2.7%
2.8%
2.7%
2.5%
2% 1.8%
1.6%
1% 0.8%
0%
-0.5%
-1%
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Source: Department of Commerce.
Quarterly % Change in U.S. Economic Output
(Real GDP - Chainweighted 2000$)
9%
7.5%
7%
6.3%
4.8% 4.9%
5% 4.5%
3.8%
3.4% 3.6%
3.5%
3.0% 3.1%
2.7% 2.7% 2.8%
3% 2.4% 2.5% 2.4%
2.1% 2.2% 2.1%
1.6%
1.2% 1.2% 1.2% 1.1%
1.0%
1% 0.6% 0.6%
0.2%
00:1 00:3 01:1 01:3 02:1 '02:3 '03:1 '03:3 '04:1 '04:3 '05:1 '05:3 '06:1 06:3 07:1 07:3
-1% -0.5% -0.5%
-1.4%
-3%
Source: Department of Commerce.
8
Housing Construction &
the New Home Market
Point
1. Some regional and local real estate markets may see price
increases around the rate of inflation
2. Housing construction was recently at record levels.
3. Potential home buyers should bargain hard. Sellers are
reluctant to drop prices because they still expect prices to
rise.
4. Potential home sellers should cut prices now to avoid riding
the market to the bottom.
Counter Point
1 The drivers of housing demand will remain weak in 2008.
2 It will take big price cuts and a long time to clear the new
home inventory of 9 months supply
3 Credit is becoming tighter for marginal borrowers as
regulators force lenders to tighten lending standards.
4 A greater share of mortgage loans are going bad.
5 The housing market is overbuilt
6 The fall in housing demand has had a direct effect on
economic growth by reducing residential construction
activity
7 The fall in housing demand has had an indirect effect on
economic growth by reducing home prices and household
wealth and therefore consumer spending.
8 Lower housing construction will reduce construction
employment and prices for building materials, appliances
and home furnishings.
Total Housing Starts & Single Family Building Permits
(seasonally adjusted annual rate)
2300
2100
1900
Thousands
1700
1500
1300
1100
Permits
900
700
95 96 97 98 99 00 01 02 03 04 05 06 07
Source: Census Bureau, http://www.census.gov/const/www/newresconstindex.html
New Home Sales (annual rate)
& Inventories
1400 650
1300 600
1200 550
Thousands
Thousands
1100 500
1000 450
900 400
800 350
700 300
600 250
500 200
95 96 97 98 99 00 01 02 03 04 05 06 07
Sales (LHS) Inventories (RHS)
Source: Census Bureau, http://www.census.gov/const/www/newressalesindex.html
10
The Housing Bubble Has Popped
(Nominal Annual Home Price Increases)
16%
14.0%
14% 13.5%
13.0%
12% 11.1%
10.0%
10%
8.4%
7.9% 7.9% 8.0%
7.4% 7.6%
8% 7.2%
6.7%
6.4% 6.6%
6.2% 6.0%
5.8%
6% 5.0% 5.1%
4.7% 4.9%
4.3%
4.1%
4% 3.1% 3.2%
2.4%
2.3%
1.8%
2% 1.5%
1.0%
0%
-2%
-2.0%
-4% -3.3%
-6%
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Source: National Association of Realators.
The Housing Cycle
(Inflation-Adjusted Annual Home Price Increases)
15%
9.5%
10%
6.5% 6.5%
6.1%
5.5% 5.7%
4.7%
5% 4.3% 4.2%
3.5%
3.3%
3.1% 2.9%
2.6%
1.4%
2.0%
1.7% 2.0% 2.0%
0.9%
0.1% 0.1%
0%
-0.1%
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
-0.4%
-0.8% -0.8%
-1.4%
-2.8%
-5% -4.2% -4.5%
-4.8% -5.0%
-7.6%
-10%
Real Home Prices Inflation
Source: National Association of Realators.
11
Income Ratios
(Financial Capabilities) 3-Dimensional
Mortgage Loan
Underwriting
65%
Total Debt
Gross Income
36% Loan Approval
Zone 2005
35%
Housing Expense
Gross Income
28%
Loan-to-Value
Loan Approval
Zone 2007
Ratios
(Physical Security)
80% 100%
670
620
580
500
Credit Scores
(Credit Characteristics)
Retail and Oil Markets
Point
1. Gains in productivity => rising incomes => consumer spending
growth
2. High oil prices have had little impact on core inflation
3. High oil prices will encourage new supplies of conventional and
non-conventional fuels in the long-run which will reduce oil prices.
4. The tax rebate in May will stimulate 2nd quarter spending
Counter Point
1 Retail sales are growing below its long-term trend of 5.5%,
indicating weakening consumer spending.
2 All drivers of consumer spending are weak or weakening.
Declining jobs, falling wealth, lower borrowing, record financial
obligations.
3 A negative wealth effect will lower spending growth in 2008.
4 Consumer spending faces many constraints: high debt burden, low
savings levels, lack of pent-up demand, high energy prices, rising
interest rates, and falling home prices
5 Falling home prices => decline in HELOC => lower spending
6 Rising interest rates => increase debt servicing => lower spending
7 U.S. households cannot maintain their profligate spending patterns.
8 The debt laden consumer will reduce consumption spending and
increase savings
9 High energy prices are reducing cash for other purchases.
10 Limited excess capacity, low oil investment, strong demand and
OPEC production limits with keep oil prices relatively high for the
next 2 years
13
Retail Sales (excluding autos)
(year over year % change)
12
11
10
9
8
7
6
5
4
3
2
1
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Oil Price per Barrel
(West Texas Intermediate Crude)
110
100
90
80
Price per barrel
70
60
50
40
30
20
10
0
70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Recession Nominal Real
14
Employment
Point
1. Labor demand remains strong in the education, health care,
leisure/hospitality and loan servings sectors.
2. Wage pressures will ebb in 2008 as productivity growth picks
up. This will reduce inflationary pressures from the labor
market.
3. The unemployment rate is below the “natural unemployment”
rate of 5 percent, according to the smaller sample size
Household Survey.
4. Goods-producing jobs are being substituted with service-
producing employment.
Counter Point
1. The housing downturn and credit market turmoil has pushed
employment and ultimately economic growth into negative
territory.
2. Discouraged workers are leaving the labor force.
3. Initial unemployment insurance claims are rising.
4. Monthly payroll employment growth is below the long term
trend, according to the Establishment Survey.
5. Businesses are reducing labor costs by using technology to
increase productivity and offshore outsourcing.
6. The unemployment rate increased 0.6% in 9 months which
historically led to a recession in less than 3 months.
7. Job growth in 2008 will not keep pace with labor force
growth, increasing the unemployment rate.
8. The unemployment rate falls as job gains top 150,000 a
month, which is the average monthly increase in the
workforce.
15
US Payroll Employment
Monthly Changes SA
600
500
400
300
Thousands
200
100
0
-100
-200
-300
Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
Unemployment Rate
11
10
9
8
Cyclical Unemployment
7
(Percent)
6
5
Full Employment 5%
4
3
Frictional Unemployment
2
Structural Unemployment
1
0
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Source: Department of Labor. Recession U.S.
16
Inflation
Point
1 The Core CPI rose 2.5% from a year ago, within the Federal Reserves
proverbial comfort zone of 1.5%-2.5%, indicating moderating underlying
inflation.
2 Goods inflation is flat while service inflation (medical) is rising.
3 A slowing economy and slower increases in housing costs will lower
price pressures and core inflation in 2008.
4 Contracting housing and manufacturing sectors will produce below-
potential growth and a reduction in inflationary pressures.
5 Forces restraining prices are efficient big box retailers, intense global
competition and tepid wage growth.
6 Core inflation stabilizing around 2% should dampen inflation
expectations in 2007
Counter Point
1 Rising oil prices are the main upside risk for inflation and a slowing
economy (stagflation)
2 Food and energy prices rose 5% and 20% respectively over the last year,
which is responsible for the gap between headline and core inflation
3 Core PCE inflation (1.9%) is in the Federal Reserve’s price stability
comfort zone (1%-2%).
4 High inflation can become permanent if workers and businesses inflation
expectations become unmoored and embedded in wages and prices
5 The Fed is losing inflation fighting credibility leading to higher inflation
expectations
6 Large swings in energy prices have increased volatility in overall
inflation, amid a general decline in the underlying rate of inflation.
7 The CPI grew 4.4 over a year ago due to a weaker dollar and higher food
and energy prices
8 Tight product and labor markets in 2007 => higher inflation => lower $
=> rising interest rates
9 Inflation depends on the level of output relative to potential output (i.e..
output gap)
10 1-yr inflation expectations are rising
(Inflation expectations = Treasury nominal rate – TIPS real rate)
8 10-yr inflation expectations are rising
(Inflation expectations = Treasury nominal rate – TIPS real rate)
17
Consumer Price Index
Annual Percentage Change
1970 to Present
14
13.3
12.3 12.5
12
10
9.0 8.9
8.7
8
6.9 6.7
6.1
6 5.6
4.9 4.7
4.44.4 4.4
4.1
3.83.8 4.0
4 3.3 3.4 3.8
3.1 2.9 3.3 3.4 3.3 3.5
2.72.7 2.5 2.6 2.5
2.4
1.7 1.6 1.9
1.6
2
1.1
0
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
Inflation (CPI)
(year over year % growth)
5%
4%
3%
2%
1%
0%
95 96 97 98 99 00 01 02 03 04 05 06 07 08
Headline
Core (excludes food and energy)
18
CU Loan Growth
Monthly Growth
Trendcycle
1.5% 1.5%
1.2% 1.2%
0.9% 0.9%
0.6% 0.6%
0.3% 0.3%
0.0% 0.0%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Source : CUNA's E&S
CU Savings Growth
Monthly Growth
Trendcycle
1.5% 1.5%
1.2% 1.2%
0.9% 0.9%
0.6% 0.6%
0.3% 0.3%
0.0% 0.0%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Source : CUNA's E&S
19
CU Loan Seasonal Factors
0.7%
0.6%
0.5% 0.47%
0.43%
0.4%
0.33%
0.27%
0.3%
0.22%
0.2%
0.1% 0.04%
0.02%
0.0%
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
-0.1% -0.07%
-0.2%
-0.23% -0.23%
-0.3%
-0.4%
-0.5%
-0.6%
-0.60%
-0.7% -0.66%
-0.8%
Source: CUNA & NCUA.
CU Savings Seasonal Factors
1.4%
1.29%
1.3%
1.2%
1.1%
1.0%
0.9%
0.8%
0.68%
0.7%
0.6%
0.5%
0.4%
0.3%
0.2% 0.13%
0.1% 0.03%
0.0%
-0.1% Jan
-0.05% Feb Mar Apr May June July Aug Sept Oct Nov Dec
-0.10%
-0.2%
-0.3% -0.22% -0.23%
-0.26% -0.28%
-0.29%
-0.4%
-0.5%
-0.6%
-0.7%
-0.70%
-0.8%
Source: CUNA & NCUA.
20
Regular Share Seasonal Factors
3.0%
2.5% 2.35%
2.0%
1.5%
1.13%
1.0%
0.44% 0.39%
0.5%
0.0%
Jan Feb Mar Apr May June July Aug Sept
-0.13% Oct Nov Dec
-0.30% -0.28%
-0.5%
-0.48%
-0.58%
-0.70%
-1.0%
-1.02% -1.05%
-1.5%
-2.0%
Source: CUNA & NCUA.
Regular Savings Account
Monthly Growth
Trendcycle
2.0%
1.5%
1.0%
0.5%
0.0%
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
-0.5%
-1.0%
-1.5%
Source : CUNA's E&S
21
Money Market Seasonal Factors
1.5%
1.28%
0.91%
0.63%
0.5%
0.27%
-0.02%
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
-0.07%
-0.26%
-0.30% -0.31%
-0.38%
-0.5% -0.45%
-1.35%
-1.5%
Source: CUNA & NCUA.
Money Market Account
Monthly Growth
Trendcycle
3.0%
Speculative
2.5%
Demand for Money
2.0%
1.5%
1.0%
0.5%
0.0%
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
-0.5%
-1.0%
Source : CUNA's E&S
22
Share Certificate Seasonal Factors
1.0%
0.8%
0.69% 0.70%
0.6%
0.4%
0.18%
0.2%
0.10%
0.06% 0.07%
0.0%
Jan Feb Mar Apr May June July Aug
-0.04% Sept Oct Nov Dec
-0.09%
-0.2%
-0.19%
-0.23%
-0.4%
-0.46%
-0.6% -0.57%
-0.8%
-1.0%
Source: CUNA & NCUA.
Certificate Account
Monthly Growth
Trendcycle
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
-1.0%
-2.0%
-3.0%
Source : CUNA's E&S
23
Credit Card Loan Seasonal Factors
5.0%
4.37%
4.0%
3.0%
2.0%
1.07%
1.0% 0.82%
0.63%
0.44%
0.08% 0.16%
0.0%
-0.04%
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
-0.66%
-1.0%
-1.67%
-2.0%
-2.36%
-2.69%
-3.0%
Source: CUNA & NCUA.
CU Credit Card Loan
Monthly Growth
Trendcycle
1.8%
1.6%
1.4%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
-0.2%
-0.4%
Source : CUNA's E&S
24
Home Equity Loan Seasonal Factors
1.0%
0.9%
0.8% 0.73%
0.7% 0.61%
0.6% 0.53% 0.55%
0.5%
0.4%
0.3%
0.2% 0.14%
0.1%
0.0%
-0.1% Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
-0.11%
-0.2%
-0.3% -0.28% -0.29% -0.29%
-0.4%
-0.41%
-0.5% -0.46%
-0.6%
-0.7%
-0.8%
-0.9%
-1.0% -0.97%
Source: CUNA & NCUA.
CU Home Equity Loan
Monthly Growth
Trendcycle
2.2%
2.0%
1.8%
1.6%
1.4%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
-0.2% 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
-0.4%
-0.6%
-0.8%
-1.0%
-1.2%
Source : CUNA's E&S
25
1st Mortgage Seasonal Factors
0.5%
0.39%
0.4%
0.28%
0.3%
0.20%
0.2% 0.17%
0.1% 0.06%
0.0%
-0.01%
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
-0.03%
-0.1%
-0.16%
-0.2%
-0.20%
-0.25%
-0.3% -0.27%
-0.4% -0.37%
-0.5%
Source: CUNA & NCUA.
CU First Mortgage
Monthly Growth
Trendcycle
1.8%
1.6%
1.4%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Source : CUNA's E&S
26
New Auto Loan Seasonal Factors
1.0%
0.88%
0.9%
0.8%
0.7%
0.57%
0.6% 0.54%
0.49%
0.5%
0.4%
0.3% 0.22%
0.2%
0.1%
0.0%
-0.1% Jan Feb Mar Apr May June July Aug Sept
-0.05% Oct Nov Dec
-0.2% -0.13%
-0.3%
-0.4% -0.33%
-0.5% -0.45%
-0.52%
-0.6%
-0.7% -0.68%
-0.8% -0.74%
-0.9%
-1.0%
Source: CUNA & NCUA.
CU New Auto Loan
Monthly Growth
Trendcycle
2.4%
2.2%
2.0%
1.8%
1.6%
1.4%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
-0.2% 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
-0.4%
-0.6%
Source : CUNA's E&S
27
Used Auto Loan Seasonal Factors
1.0%
0.9%
0.8%
0.7%
0.60%
0.6% 0.52%
0.5%
0.38%
0.4%
0.25% 0.27%
0.3%
0.17%
0.2%
0.10%
0.1%
0.0%
-0.1% Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
-0.08%
-0.2%
-0.3%
-0.4%
-0.40%
-0.5%
-0.6% -0.55%
-0.7% -0.63%
-0.8%
-0.9%
-0.89%
-1.0%
Source: CUNA & NCUA.
CU Used Auto Loan
Monthly Growth
Trendcycle
2.2%
2.0%
1.8%
1.6%
1.4%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
-0.2%
Source : CUNA's E&S
28
Economic Environment
• Overall Economy
– Fragile economy in face of liquidity crunch.
– Unprecedented real estate deflation, will create a
wealth effect on consumer spending.
– Strength from business investment spending and
foreign demand.
– Recession a rising possibility, but a very difficult
call.
– Housing and autos will be weak.
• Interest Rates
– Modest Fed Funds rate cut(s) likely in second half,
yield curve still flat.
– If a recession, rates will fall by more, with a
steepening yield curve.
Credit Union Environment
• Savings growth relatively stronger than loan growth,
compared to last few years.
• Relative shift from core to interest sensitive deposits.
• Changes in consumer auto buying behavior, but
pressure from dealer incentive financing.
• Economic distress for some members.
• Growth opportunities in unsecured loans.
• Continued margin pressures.
• Some investments may need to be written down.
• Greater economic pressures on smaller CUs.
• Continued wealth transfers.
Top 14 Credit Union Responses
1. Find ways to productively deploy capital.
1. Faster growth, more attractive pricing.
2. Modest risk increases.
3. New services and outreach.
2. New world of margin management, 1% no longer
sacrosanct.
3. Expense control even more important.
4. Seek non-fee, non-interest income.
5. Segmentation in deposits. (CD specials)
6. BUT, flat yield curve won’t be permanent.
7. Align auto loan marketing to current car buying habits.
8. Tighter lending at other lenders provides an opportunity
for credit unions.
9. Improve business planning: consider demographics, new
products and services, membership growth.
10.Differentiate ourselves in how we treat borrowers,
especially ones who might be victims of predatory
lenders.
11.Consider earlier trip wires for loss mitigation and default
workarounds.
12.Build investment ladder, consider extending maturities in
face of falling rates.
13.Conduct member research to improve member
satisfaction.
14.Consider aggressive loan recapture programs
CUNA’s Economic and Credit Union
2008 & 2009 Forecast
ECONOMIC FORECAST
• Economic growth will slow to 0.9% in 2008, well below the long-term sustainable trend growth
rate of 3.5%. The U.S. economy will tip into recession in the first half of 2008. Falling home prices
and credit market turmoil will reduce consumer spending and aggregate output. Aggressive fiscal
and monetary stimulus will jump start the struggling economy in the third and forth quarters.
• Core inflation will decline to 1.8% over the next two years. Stable energy prices and a slowing
economy will reduce headline inflation to 2% over the next two years. Core inflation (excluding food
and energy prices) will gradually decline as below potential economic growth reduce wage and price
pressures.
• The unemployment rate will climb to 5.8% by year-end 2008. The consumer induced recession
will lead to a weak labor market over the next two years. Job growth will not keep pace with the
increase in the labor force, pushing the unemployment rate to over 6% by 2009.
• The fed funds interest rate target will fall to 2% by May 2008. The Federal Reserve will lower
their fed funds interest rate target by 50 basis points at the March 18 and April 30 rate-setting
meetings. Once the labor market shows signs of recovery, the Fed will quickly raise interest rates to
keep inflation expectations anchored.
• The 10-year Treasury interest rate will increase modestly in 2008 and 2009. A slowing economy
will keep long-term interest rates below 5% for the next 2 years. The quantity of foreign capital
channeled into the U.S. Treasury market is the big question moving into 2008. If Asian and Middle
eastern central banks switch their foreign exchanges reserves to higher yielding assets, the drop in the
supply of capital will put upward pressure on long-term interest rates.
• The Treasury yield curve will steepen in 2008. Money market interest rates should fall to the 2%
range in 2008, while longer-term capital market interest rates should rise over 4%. This should make
the business of borrowing short term and lending long term much more lucrative relative to the past
few years.
CREDIT UNION FORECAST
• Credit union saving growth will rise to 10% in 2008. A recession, falling home prices and a tax
rebate to 135 million Americans will double the credit union savings growth rate in 2008 relative to
2007. Expect a massive savings inflow in May and June as the Treasury Department begins sending
out tax rebate checks.
• Credit union loan growth will slow to 5% in 2008, the lowest pace since 1998. A slowing economy,
falling consumer confidence, tighter underwriting standards and low pent-up consumer demand will
reduce members’ demand for loans.
• Credit quality will deteriorate in 2008. Falling home prices and the continuing mortgage credit
crisis will spillover into the auto, credit card, student and business lending sectors. Delinquency rates
will rise to 1.35% in 2008, up from 1% in 2007. The largest increase will be concentrated in areas
with the biggest housing price corrections. Moreover, lower loan growth, loan seasoning and a
weaker economy will increase net loan charge-offs and provisions for loan loss.
• Credit union return on assets will fall to 0.53% in 2008. Deteriorating credit quality and slower
loan growth will reduce credit union ROA to the lowest level since 1980 when they earned 0.26%. A
steepening yield curve in 2008, however, should remove some downward pressure on credit union
net interest margins.
• Capital-to-asset ratios will decline to 11% in 2008. Capital contributions will not keep pace with
asset growth, lowering net worth ratios.
31
Economic Forecast
February 2008
Actual Results Quarterly Results/Forecasts Annual Forecasts
5Yr Avg 2007 2008:1 2008:2 2008:3 2008:4 2008 2009
Growth rates:
*Economic Growth (% chg GDP) 2.9% 2.2% -0.5% -0.5% 2.5% 2.0% 0.9% 2.5%
Inflation (% chg CPI) 3.1% 4.1% 2.0% 2.0%
Core Inflation (ex. food & energy) 2.1% 2.4% 2.2% 2.0% 1.5% 1.5% 1.8% 1.8%
Unemployment Rate 5.2% 4.6% 5.2% 5.4% 5.6% 5.8% 5.5% 6.0%
Fed Funds Rate 3.14% 5.02% 3.25% 2.17% 2.00% 2.00% 2.4% 2.50%
10-Year Treasury Rate 4.40% 4.63% 3.80% 4.00% 4.10% 4.20% 4.03% 4.40%
* Percent change, annual rate
All other numbers are averages for the period
Credit Union Forecast
February 2008
Actual Results Quarterly Results/Forecasts Annual Forecasts
5Yr Avg 2007 2008:1 2008:2 2008:3 2008:4 2008 2009
Growth rates:
Savings growth 5.1% 4.8% 4.6% 2.2% 1.4% 1.8% 10.0% 9.0%
Loan growth 9.4% 7.6% -0.3% 2.3% 1.9% 1.1% 5.0% 6.0%
Asset growth 7.1% 6.1% 4.3% 1.9% 1.1% 1.7% 9.0% 8.1%
Membership growth 2.5% 1.7% 0.6% 0.8% 0.4% 0.2% 2.0% 2.0%
Liquidity:
Loan-to-share ratio** 75.2% 84.6% 80.6% 80.7% 81.1% 80.6% 80.6% 78.3%
Asset quality:
Delinquency rate 0.74% 1.00% 1.20% 1.40% 1.40% 1.40% 1.35% 1.30%
Net chargeoff rate* 0.52% 0.48% 0.80% 0.80% 0.70% 0.70% 0.75% 0.65%
Earnings
Return on average assets (ROA)**0.88% 0.65% 0.45% 0.45% 0.60% 0.60% 0.53% 0.70%
Capital adequacy:
Net worth ratio** 11.2% 11.5% 11.1% 11.0% 11.1% 11.0% 11.0% 10.9%
* End of period annualized rate
**End of period ratio
See also our MCUE website
If you have any questions or comments send an email to srick@cuna.coop
32
System Challenges
1) Competition
2) Consolidation
3) Banker attacks/taxation
4) Service to modest means
5) Charter changes/conversions
