What Credit Unions Can Expect from the 2012 Economy

Encouraged by stronger-than-anticipated retail sales experienced early through the holiday season, a number of economists have recently raised estimates for fourth quarter growth in gross domestic product (GDP) to around 2.75 percent. This rate of growth is much stronger than economists were projecting a few months ago, when consumer sentiment was gloomier and Europe’s sovereign-debt problems were escalating. Will this stronger rate of growth carry over into the first quarter of 2012 and beyond? What else can credit unions expect in the months ahead?

Stronger holiday retail sales give credit unions reason for a “cautiously optimistic” outlook for the economy in 2012, according Brian Turner, director of the advisory service for Catalyst Strategic Solutions. The rate of growth, however, still largely depends on two main factors: employment and continued consumer spending.

“Simply put, credit union members remain insecure about their jobs,” Turner said. “They see their household wealth being impacted by falling home values, and volatility in the stock markets has threatened their 401(k)s. Over the past few years, consumers have deferred their big-ticket purchases, such as automobiles, homes and appliances—all purchases for which credit unions extend credit.”

Turner acknowledged that a stable employment picture is the foundation for future economic growth, saying that it impacts consumer spending behavior, facilitates demand, and spurs construction and investment.

“Currently, the unemployment rate is 8.6 percent, with about 13.3 million workers idle,” Turner said. “The number of long-term unemployed (those jobless for 27 weeks or longer) is around 5.7 million, or about 43 percent of the unemployed base. The underemployment rate, which includes unemployed plus part-time workers seeking full-time employment and individuals not actively seeking employment, stands at 15.6 percent.”

Unless the employment climate sees significant improvement, Turner expects modest loan demand to continue in 2012. As consumer spending comprises two-thirds of the nation’s GDP, “how” and “if” credit union members spend their money directly impacts overall economic growth.

“Job insecurity and loss of household wealth have greatly impacted spending, which in turn has affected credit union balance sheets,” Turner said. “Most analysts believe the unemployment rate must fall to at least 8.0 percent to spur enough spending to provide greater economic stability and to spark loan growth back above 5 percent.”

But most economists do not expect the unemployment rate to fall lower than 8.3 percent in 2012, according to Turner, so he projects “modest” loan growth, in the 1.5 to 2.5 percent range.

“For most credit unions, this could necessitate a greater dependence on investment portfolio assets to replicate current revenue streams,” he said. “Currently, every $1 of loan principal received would require $2.65 of redeployed investment principal.”

The news is more encouraging for share growth. Even with stagnant wage growth expected in 2012, credit unions should not have problems bringing in shares.

“In this environment, members tend to look more to safety of the funds rather than earnings on their savings.” Turner said he also expects share growth to mirror 2011, ranging from 6 to 8 percent.

Modest loan growth and improved delinquencies will continue to enhance asset yields, while strong liquidity profiles will hold down the cost of funds in 2012, Turner predicts.

“Profitability then will depend on credit unions’ ability to hold operating costs in check. Some credit unions,” he said, “will find it more advantageous in this environment to boost their capital formation by shrinking their balance sheet.”

What does the current environment likely mean for interest rates in 2012?

The Fed has already telegraphed its intent to retain overnight rates at their current level until mid-2013, and Operation Twist is an attempt to hold down longer-term rates,” Turner explained. “Combined, these actions could create less steepness in the yield curve, which could impact marginal spreads. So far, industry net interest spreads have remained stable as lower marginal asset yields have been offset by improved delinquency rates.”

Catalyst’s advisory service can assist credit unions with growth strategies for 2012. For more information, contact Mike McGinnis at 800.301.6196.


Questions? Contact Sales & Marketing Associate Craig Reed: 206.340.4789, creed@nwcua.org.

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