Although the implosion of the credit markets triggered by sub-prime lending has already taken a toll on the economy, the full effects have not yet played out, according to analysis provided in the September 2007 Credit Union Trends Report  (295 KB/8 pages) newsletter.

The upshot appears to be a much slower and more difficult economic environment than earlier anticipated, the monthly newsletter reports, using data compiled through July 2007. It notes that economists have increased the probability of a mild recession to 30%.

“Even these experts believe we are headed into uncharted waters,” says Dave Colby, CUNA Mutual’s Chief Economist. “They now assume the Federal Reserve will cut the Fed Funds rate 75 basis points by year-end.”

Other report highlights for credit unions:

• Annual loan growth improved to 6.9% in July, boosted by 2.8% three-month rise but just 3.9% year-to-date.
• In the past year, about 48% of the $34 billion total loan gain came from fixed-rate first mortgages; 27% from second mortgages, and 11% from credit cards. “A word of caution,” offers Colby. “All three areas of future weakness drove current gains.”
• Vehicle loans, which represent 34% of all loans, contributed just 6% of the annual gain.
• Economic growth is predicted to weaken as consumers retrench from spending and borrowing. “CUs can expect annual loan growth to fall below 5.5% by year-end and only fractional improvements in 2008,” says Colby.
• Savings and assets fell in July due to payroll timing and seasonal factors. Assets stood at $760 billion, up 6.1% from a year earlier. Consequently, the capital-to-asset ratio (11.5%) and loan-to-share ratio (82.6%) rose to near record levels in July, while delinquencies remained low.
• There were 8,490 credit unions at the end of July, a net loss of 172 credit unions this year and 335 over the past year.
• Total credit union membership rose to 90.4 million, an exceptional gain of 2.2 million for the year, but downward revisions are anticipated.

“Credit unions will need to search out ways to help members through this challenging period,” says Colby, “but keep a watchful eye on deposit rates, credit quality, and collateral valuations.”

View the three most recent monthly Credit Union Trends Report newsletters.