Credit unions should enjoy the good times now, and start preparing for a mild recession in 2019, CUNA Mutual Group chief economist Steven Rick said Thursday.
The U.S. economy’s expansion is expected to continue at an annual rate of up to 2.4% into 2018, but U.S. GDP could begin to contract the next year, he told attendees at CUNA Mutual Group’s eighth annual Discovery Conference in Madison, Wis.
“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.”
At the moment, credit unions are benefitting as banks tighten lending standards on car loans. Credit unions’ portfolio of new car loans at the end of May was 17% higher than a year earlier, boosted by indirect lending. Used car loans were up 13%.
Rick expects interest rates will rise over the next four years as they start to recalibrate to their natural rates: about 3% for short-term rates and 4% for 10-year Treasury bonds. Consumers will spend less, pay down debt and save more.
Car sales will start to slow down through 2020, and home sales will start to slow down in 2019 and 2019, in part because of limited housing inventory and rising prices.
Federal Reserve will raise rates a quarter of a point through 2018. As the Fed funds rate increases to 3%, credit unions’ cost of funds will also rise through 2021, to reach about 2%, Rick said.
Credit unions’ yield-to-assets is currently the lowest in history, at 3.5%, but as the 10-year Treasury rate rises, 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.
Rick said this will be the fourth year of double-digit loan growth, but he predicted growth will slow to 7.5% in 2018 and to about 5% in 2020.
Memberships, which have been rising rapidly with strong growth in jobs and credit union loans, will slow to a range of 3% to 3.5% through 2018.
All of these trends will be magnified at smaller credit unions and lessened at the larger credit unions, which will be able to offer a broader array of loans to make up for declines in particular sectors. About 1,000 credit unions will be fold or be acquired by others over the next four years, he said.
CUNA and CUNA Mutual Group, both based in Madison, predict inflation will rise 2% this year and 2.3% in 2018.
Mike Schenk, CUNA’s vice president of research and policy analysis, said in CUNA’s monthly Economic Update released this week that fears of a rapid rise in inflation are overblown. Reasons include:
- “The economy has been very close to almost full employment for almost a year, but incomes are not rising quickly,” he said. “That suggests spending gains, and associated price pressures, should be manageable.”
- The shift in spending from brick-and-mortar stores to online retailing is keeping prices down.
- Baby boomers are retiring at a record pace of 10,000 a day. “Those folks are spending like— retirees. They’re not fueling inflation pressures,” Schenk said.
