CUNA Economist Gives ‘Rosiest’ Forecast in Seven Years

Improving labor market, lack of inflation continue to buoy economy.

August 22, 2014
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Mike Schenk

The U.S. economy should grow at a 3.5% pace during the second half of 2014, and 3.75% in 2015, says Mike Schenk, CUNA’s interim chief economist.

“That’s one of the rosiest outlooks that we’ve put together in more than seven years,” he said during CUNA’s Pressing Economic Issues Series (PEIS) in August.

Also buoying the economy are a lack of inflation pressure and a dramatically improving labor market. “We expect the unemployment rate to drop very close to 5% at the end of next year,” Schenk says.

This good news has implications for credit unions, he adds, which should translate into increased loan volume.

“There’s a tremendous amount of pent-up demand in the system,” Schenk says. “As the economy improves and more people are put to work, wages and salaries will grow at higher rates than they have in the past,” aiding consumer spending and borrowing going forward.

He warns, however, that not all consumers are experiencing financial improvements personally.

CUNA's current credit union forecast calls for:

• Savings growth of 3.5% in 2014 and 3% in 2015. Next year’s slowdown likely will be a result of the Federal Reserve raising short-term interest rates, which will cause some members to transfer funds to money market mutual funds.

Membership growth of around 2.25%—twice the rate 1% population growth rate. This help buoy savings growth.

• Loan growth of 9.6% in 2014 and 10% in 2015, the fastest pace since the 11% growth rate set in 2005.

Expect households to release pent up demand for vehicles, furniture, and appliances over the next two years. New auto loans, credit card loans, and purchase mortgage loans will be strong growth areas.

• Improved credit quality. The overall loan delinquency rate will decline to 0.7% in 2015, below the long-run average of 0.75%, as job growth continues.  Provisions for loan losses as a percent of assets will fall to 0.22% in 2014 and rise to 0.25% in 2015.

• Rising return on assets. Credit union return on assets will grow to 0.85% in 2014 and 0.95% in 2015. Rising yield on assets due to faster loan growth will increase net interest margins, and the elimination of corporate credit union assessments will lower operating expenses.

Nonetheless, a drop in mortgage refinancing will reduce “gains on sale of mortgage” income.

• Higher capital-to-asset ratios will rise to 11.1% in 2014. Capital growth will outpace asset growth over the next two years, increasing credit unions overall capital-to-asset ratio to 11.1% in 2014 and a record high of 11.6% in 2015. The previous high was 11.5%, in 2006.

Click here for a condensed version of Schenk’s August 2014 PEIS discussion.

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