MADISON, Wis. – Credit unions can expect the U.S. economic growth will remain above trend in 2017 and into 2018, said CUNA Mutual Group’s director and chief economist Steven Rick. As credit unions continue to reap the benefits from this economic expansion, the next two years will continue to see a growth of up to 2.4 percent, he told attendees at CUNA Mutual Group’s eighth annual Discovery Conference today.1
“We continue to benefit from the second longest economic expansions in U.S. history and credit unions have benefited from these tailwinds,” said Rick. “But we should continue to expect to see the Federal Reserve raise interest rates in the next year. We could also see a modest recession in 2019, due to a short-term credit cycle recalibration, but this will not emulate the recession we experienced in 2008.”
Rick continued to explain that both long and short-term interest rates will continue to rise over the next four years, as they start to recalibrate to their natural rates, approximately 3 percent in short-term interest rates and 4 percent in 10-year Treasury bond interest rates.1 This recalibration will affect consumer spending in the coming years with consumers looking to pay down debt and increase their savings due to higher interest rates.
“As we slowly see interest rates rise, we see some changes in consumer spending,” said Rick. “Although we saw an explosion of new car sales with record sales reaching over 18 million new cars sold due to pent up demand, sales will start to slow down through 2020.”
Rick states that financial institutions are tightening up their auto lending requirements which is shifting lending to alternative outlets, like credit unions. “Credit unions have seen almost a 17 percent growth in new auto lending, particularly with indirect lending1”
That is good news for credit unions looking to continue to grow in the coming years, Rick adds.
Rick also discussed trends in home sales over the past two years. With first-time home buyer demand accelerating, particularly in the millennial consumer segment, mortgage lending continues to grow as consumers look to lock in interest rates before the next rate hike. However, limited inventory in available homes across the country will continue to cause homes prices to rise between 4 - 5 percent through 2018. With this limited inventory of available homes, Rick anticipates home sales will start to slow down in 2019 and 2020.1
Rick also discussed how these economic trends, interest rates and consumer spending will affect credit unions over the next few years.
“We expect the Federal Reserve will continue to raise rates throughout 2018 to manage the economic growth,” said Rick. “We’re forecasting rates will rise by a quarter of a point through 2018. As the Fed funds rate increases to 3 percent, credit unions cost of funds will also rise through 2021, to reach approximately 2 percent.1”
Rick adds that credit unions’ yield to assets is currently the lowest in history, at 3.5 percent, but as the 10 year treasury rate rise, credit unions’ yield on assets will rise. For most credit unions, the yield on assets will increase faster than costs of funds, which will improve their bottom line, mainly due to the repricing of short term assets, like home equity and credit card loans.
“Lending is an important part of the credit union; we have continued to see very strong loan growth in 2017 with four consecutive years of double digit 10 percent loan growth. We are forecasting a slowdown in 2018 to 7.5 percent and to about 5 percent growth in 2020.”
Rick says that consumers will start to pay down their debt and credit unions will see about 4 percent loan growth due to that trend. In addition, there will be strong loan growth concentration in larger credit unions, as they continue to offer multiple lending products to make up for the slowdown.
Lastly, Rick outlined key indicators to watch within the credit union industry. He states that while the industry continues to see record credit union membership growth, membership will start to slow to 3 - 3.5 percent through 2018, due to slower job growth and slower lending trends. This rate continues to outpace the natural growth of the U.S population.1
The industry will also see fewer credit unions in 2017 with approximately a 3.5 percent credit union decay rate over the next four years, totaling approximately 250 fewer credit unions each year. However, credit unions with $1 billion in assets or more are the fastest growing segment with large credit unions experiencing record membership growth as well.1
“Bottom line, the U.S. consumer is financially healthy, our economy continues to see steady growth despite interest rates and lending slowdowns, we continue to maintain record low unemployment, and home values starting to increase again,” said Rick. “While these are all indicators that the economy is strong, we need be mindful of 2019, with a potential recession, something to plan for in the coming year.”
To learn more, watch Rick’s Discovery Conference breakout session, “The Economy & Its Impact on Your 2018 Strategic Plan,” on-demand.
The Discovery Conference is the credit union industry’s leading online conference hosted annually by CUNA Mutual Group for credit union leaders. Participants enjoy the conveniences of attending sessions and hot topic chats virtually with on-demand content available 24/7 following the conference. Discovery’s on demand sessions are available here at no cost.
About CUNA Mutual Group:
CUNA Mutual Group helps people plan, protect and invest for their future – regardless of their financial standing. The company was founded more than 80 years ago by credit union leaders who were looking for an insurance partner they could trust. Today, CUNA Mutual Group helps credit unions and hardworking Americans build financial security through commercial and personal insurance products; lending and payment security solutions; and risk management, retirement, investment and marketing services. Additional information about the company can be found at www.cunamutual.com.
1 CUNA Mutual Group’s Discovery Conference presentation: The Economy & Its Impact on Your 2018 Strategic Plan, Aug. 17, 2017. CUNA Mutual Group is the marketing name for CUNA Mutual Holding Company, a mutual insurance holding company, its subsidiaries and affiliates. Corporate headquarters are located in Madison, Wis.