Credit Union National Association (CUNA) economists completed their quarterly update of the economic and credit union outlook, affirming the belief the economy will be constant despite looming national fiscal issues and fallout from European debt problems.
The economists "made few changes to our existing outlook," said Mike Schenk, CUNA senior economist. In addition, "those that we did make were relatively minor," he added.
"Our baseline forecast continues to reflect the belief that the economy will sidestep the potential nasty consequences of a Eurozone meltdown and/or a fall off the 'fiscal cliff,'" Schenk explained. "The uncertainty surrounding those issues and combined with weakly recovering labor markets will likely keep investors, business, and consumers continuing to behave cautiously in the months ahead."
The group cut its full-year 2012 estimate of economic growth by 0.3% --to 1.7% from 2.0%, but kept its full-year 2013 outlook unchanged, with an expectation of 2.5% growth. That's well below the 3.25%; post-war average and under the implicit 3%to 3.5% policy target.
"We made no change to our outlook for unemployment which continues to reflect an 8% average unemployment rate in 2012." They forecast the rate would finish the year at 7.75% -- and, drift down "very slowly during 2013, averaging 7.75% during the year--and finishing the year at about 7.5%, Schenk said.
With cautious consumption, modest increases in aggregate demand, and falling commodity prices, inflation pressures will stay within the Federal Deposit Insurance Corporation's (Fed's) comfort range, the group indicated.
"At this point, we think headline inflation will average 1.75% over the forecast horizon," Schenk said. "Given this, we see the Fed keeping its foot firmly planted on the economic accelerator--and no change in the Fed Funds; target rate over the next 14 months."
Low core inflation should likewise keep inflation expectations low. Therefore, the 10-year treasury yield is likely to change very little--averaging 1.8% in the fourth quarter, 1.82% for the year, and 2.25% in 2013, the group said.
The credit union outlook calls for savings growth of 6%; in 2012 and 5%; in 2013--unchanged from the previous forecast--and for loan growth of 4% in 2012--up from the previous 3% forecast--and 5% in 2013. "Assuming we're correct and loan growth fails to exceed savings growth, credit union loan-to-share ratios will dip modestly with large, low-yielding investment portfolios continuing to put pressure on bottom-line results," Schenk said.
"The forecast is a bit more upbeat on the asset quality front, reflected in slight downward revisions to our delinquency forecast, but the group left net charge-off expectations unchanged with a net charge-off rate averaging 0.81% this year and 0.65% in 2013," Schenk said. That's a return toward--but not all the way "to"--normal. Net charge-offs average about 0.5% during economic expansions historically, he added.
"We still [forecast] bottom-line results at 0.8% for 2012 but reduced our full-year 2013 outlook to 0.7%," Schenk explained. "A slightly flatter yield curve will keep pressure on interest margins in 2013, and we expect mortgage originations to remain high, which will keep operating expense ratios marginally higher than they otherwise would be and since mortgage rates will be declining modestly the noninterest income related to gains on mortgage sales may erode despite strong origination volumes."
Allowance accounts appear overfunded and declines in loss provisions will add about 20 basis points in earnings in 2012, compared with 2011, but there was some disagreement about the pace of future declines in provisions, the group said. "At the end of the day two of us agreed that the provision-for-loan-loss declines would be small in 2013," Schenk noted.
For a copy of the full CUNA forecast, click here.
Also, CUNA Chief Economist Bill Hampel's recently posted explanation of the forecast can be obtained by signing up for CUNA's "Pressing Economic Issues Series" for a video update and more thorough explanation of the changes and trends anticipated. For more information, Click here.