CUNA’s Economic, Credit Union

2008 & 2009 Forecast

ECONOMIC FORECAST

• Economic growth will slow to 0.6% in 2008, well below the long-term sustainable trend growth rate of 3.5%. The U.S. economy will tip into recession in the first half of 2008. Falling home prices and credit market turmoil will reduce consumer spending and aggregate output. Aggressive fiscal and monetary stimulus will jump start the struggling economy in the third and forth quarters.
• Core inflation will decline to 1.8% over the next two years. Stable energy prices and a slowing economy will reduce headline inflation to 2% by 2009. Core inflation (excluding food and energy prices) will gradually decline as below potential economic growth reduce wage and price pressures.
• The unemployment rate will climb to 5.8% by year-end 2008. The consumer induced recession will lead to a weak labor market over the next two years. Job growth will not keep pace with the increase in the labor force, pushing the unemployment rate to over 6% by 2009.
• The fed funds interest rate target will fall to 1.5% by June 2008. The Federal Reserve will lower their fed funds interest rate target by 50 basis points at the April 30 rate-setting meeting and 25 basis points on June 25. Once the labor market shows signs of recovery, the Fed will quickly raise interest rates to keep inflation expectations anchored.
• The 10-year Treasury interest rate will increase modestly in 2008 and 2009. A slowing economy will keep long-term interest rates below 5% for the next 2 years. The quantity of foreign capital channeled into the U.S. Treasury market is the big question moving into 2008. If Asian and Middle eastern central banks switch their foreign exchanges reserves to higher yielding assets, the drop in the supply of capital will put upward pressure on long-term interest rates.
• The Treasury yield curve will steepen in 2008. Money market interest rates should fall below 2% in 2008, while longer-term capital market interest rates should rise to around 4%. This should make the business of borrowing short term and lending long term much more lucrative relative to the past few years.

CREDIT UNION FORECAST

• Credit union saving growth will rise to 10% in 2008. A recession, falling home prices and a tax rebate to 135 million Americans will double the credit union savings growth rate in 2008 relative to 2007. Expect a massive savings inflow in May and June as the Treasury Department begins sending out tax rebate checks.
• Credit union loan growth will slow to 5% in 2008, the lowest pace since 1998. A slowing economy, falling consumer confidence, tighter underwriting standards and low pent-up consumer demand will reduce members’ demand for loans.
• Credit quality will deteriorate in 2008. Falling home prices and the continuing mortgage credit crisis will spillover into the auto, credit card, student and business lending sectors. Delinquency rates will rise to 1.35% in 2008, up from 1% in 2007. The largest increase will be concentrated in areas with the biggest housing price corrections. Moreover, lower loan growth, loan seasoning and a weaker economy will increase net loan charge-offs and provisions for loan loss.
• Credit union return on assets will fall to 0.53% in 2008. Deteriorating credit quality and slower loan growth will reduce credit union ROA to the lowest level since 1980 when they earned 0.26%. A steepening yield curve in 2008, however, should remove some downward pressure on credit union net interest margins.
• Capital-to-asset ratios will decline to 11% in 2008. Capital contributions will not keep pace with asset growth, lowering net worth ratios.