Sunday
May 19th
| Looking Forward to 2013 May Require Looking Backward |
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| Written by Brian Turner | |||
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When addressing the latest economic outlook for 2013 and what it might mean for the nation's credit unions, there are three principle thoughts: 1) apparently it is true what they say about opinions – at least the part about everyone having one, 2) there appears to be plenty to blame for the current mess but very few specific remedies, and 3) refer back to number one. Economic Growth and Member Spending Behavior will Remain Modest According to the latest forecast by the Federal Reserve and major market analysts, the nation's economic growth is projected to range between 2.2 and 2.4 percent next year. This is slightly better than the 2 percent pace anticipated for all of 2012. With consumer spending accounting for two-thirds of the nation's GDP, that puts spending expectations next year somewhere between 2.4 and 2.6 percent, slightly ahead of the 2 to 2.4 percent spending rates in 2012. The employment sector continues to be the principle driver. Consumers continue to feel insecure about their jobs and worry about their household wealth profi le, as home values and stock market indices remain volatile. This hampers their desire to spend money, especially on big-ticket items such as automobiles, homes and appliances – all areas for which credit unions historically have extended credit. This climate is less interest rate-sensitive to credit union members and more relevant to their personal cash fl ow profi les. It certainly has given members the opportunity to reduce their personal debt burdens as they pay off higher rate obligations. It has helped families live more within their means. However, there is what is commonly referred to as "burnout syndrome" in effect, as the average car on the street is now more than 12 years old and members are financially well beyond cabin fever. Similar to the feeding frenzy that follows a fast, this sparks "flash markets" of euphoria as members hit the retail markets running – if only just to satisfy their immediate appetite. We've already seen evidence of this in 2012, as vehicle sales spiked from 13.5 million to 14.5 million annual units over a six-month period, only to see current forecasts drop back below 14 million for next year. Modest Gains Should be Expected in Consumer and Mortgage Loans Despite the latest reports on consumer confidence, which recently dropped for a fourth consecutive month, analysts do expect consumer spending to increase around 2.5 percent next year. This is slightly better than 2012, but remains below historical norms. Flash markets experienced during the first half of 2012 resulted in credit union consumer loans increasing 4.6 percent, as a 2.2 percent decline in credit cards was offset by a 7.2 percent increase in vehicle loans. This is an improvement from 2011's one percent increase and 2010's 3.4 percent decline. Yet, according to Federal Reserve data, the industry's market share in non-revolving loans fell from 10.7 this time last year to today's 10.5 percent. The mortgage market continues to be driven by refinancing applications, accounting for 85 percent of total mortgage applications. The industry's first-lien mortgage loans increased 6.8 percent during the first half of the year, driven by a 9.7 percent increase among credit unions with more than $500 million in assets, which account for 65 percent of the industry's total assets but only 6 percent of the number of credit unions in the U.S. This group apparently has a bigger appetite and capacity to retain its current originations, while tighter net margins tend to increase minimum rate requirements perceived by smaller credit unions, which in turn directly limits their growth capacity. Yet, both consumer and mortgage loan originations continue to provide the best relative value option and a higher total return profile for most allocation alternatives. Today's spread differentials, along with projected interest rate conditions and projected growth, are sufficient to absorb a great deal of the implied interest rate risk exposure perceived by most institutions. The challenge for many will remain whether one's concern over perceived risk exposure in the future is greater than the opportunity lost from the 240 to 285 basis point differential in the current spread. Think Interest Spread Rather than Interest Rate Three-quarters of credit union earnings are determined by the spread between a credit union's earning assets and paying funds. The net margin of an institution with a 10 percent asset yield and 8 percent cost of funds is the same as an institution with a 3 percent asset yield and a 1 percent cost of funds. The Federal Reserve has already telegraphed its plan to retain overnight rates near its current 0 to 25 basis points level until the end of 2014. Through its "Operation Twist," it will attempt to keep longterm rates down to remove the disincentive for fi financial institutions to lend when there is enough slope in the yield curve to satisfy their returns without taking on credit exposure. This will keep short-term rates in check for a while, and at the same time, create volatility in the long-term rates. Let's hope the volatility coincides nicely with the fl ash markets.
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