CUNA Mutual Group Proprietary | Reproduction, Adaptation or Distribution Prohibited | © 2016 CUNA Mutual Group, All Rights Reserved.
Economic &
Credit Union Update
If you have any questions or comments,
please contact:
Steven Rick, Chief Economist
CUNA Mutual Group – Economics
800.356.2644, Ext. 665.5454
October 2017
2
5 Minute Federal Reserve Board Meeting
Federal Reserve Critical Measures
Federal Reserve’s
Dual Mandate 1. Stables Prices
2. Full Employment of
Resources
Long-Run
Equilibrium
Goal
Actual
Inflation Rate 2% 1.4%
Unemployment Rate 5% 4.4%
Economic Output Gap 0% -0.5%
Fed Funds Interest
Rate
3% 1.15%
10-Year Treasury Rate 4% 2.3%
33
Stronger Economic Growth in 2017, around 2.3%
U.S. Economic Growth Rate
4.1%
1.0%
1.8%
2.8%
3.8%
2.7%
1.8%
-0.3%
-2.8%
2.5%
1.6%
2.2%
1.5%
2.4%2.6%
1.6%
2.3%2.3%
-1.0%
2.0%
3.3%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
Economic Growth Rate
Long Run Growth Rate
Source: Department of Commerce.
Trump’s policies if implemented could boost short-run
economic growth above the base case forecast (see chart).1. Infrastructure Spending ($1 trillion in spending over 10 years)
• Roads, bridges, water/sewer systems, border wall
• Fiscal policy will take on a bigger role versus monetary policy
• $100 billion in spending => faster economic growth (0.5% to 1%)
2. Tax Reform ($4.6 trillion in lower taxes over 10 years)
• Lower headline corporate income tax rate (35% to 15%).
• Lower personal tax rates and fewer brackets (7 tax brackets down to 3)
(12% up to $37,500, 25% on $37,500-$112,500, 35% above $112,500).
• One-off offer to repatriate foreign profits at 10% rate.
• Move from global to territorial tax system.
• Repeal estate tax and alternative minimum tax.
• Full expensing of capital costs => increasing business investment.
3. Repeal and Replace Affordable Care Act
4. Modify Dodd-Frank Act to decrease credit supply constraints
5. Loosen environmental regulations, scale back climate change regulations and
remove restrictions on energy production.
6. Anti-globalization and Trade Protectionism Policies => Trade War
• Withdrawal/renegotiate trade deals (NAFTA, TPP)
• Tariffs on Mexican (35%) and Chinese (45%) goods
• Label China currency manipulator
But policy uncertainty can have profound effects on spending:• Business delay hiring and capital investment (but mostly hiring)
• Consumers delay durable goods purchases
44
Falling GDP Output Gap in 2017 With the Economy Reaching its Potential Level of Output
GDP Output Gap
vs.
Federal Funds Rate
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
7.0%Recession
Output Gap (Left Axis)
Federal Funds Rate (Right Axis)
Source: CBO & Federal Reserve.
55
Residential Investment
0.7%0.9%
6.1%
9.1%10.0%
-7.6%
-18.8%
-24.0%
-21.2%
-2.5%
0.5%
13.5%11.9%
3.5%
11.7%
4.9%4.8%2.6%2.2%2.3%
6.6%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
Source: Department of Commerce.
Single Family Housing Starts & Building Permits
(seasonally adjusted annual rate)
200
300
400
500
600
700
800
900
1,000
1,100
1,200
1,300
1,400
1,500
1,600
1,700
1,800
1,900
2,000
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Th
ou
san
ds
200
300
400
500
600
700
800
900
1,000
1,100
1,200
1,300
1,400
1,500
1,600
1,700
1,800
1,900
2,000
Thousa
nds
Starts Recession Building Permits
Housing Construction will Accelerate in 2017Housing Starts Limited by Few Unemployed Construction Workers
66
Unemployment Rate Hitting 4.0% in 2018, below Full Employment
Trump’s Policies on Labor Market1. Trump’s policies would lower the unemployment rate below the base case
unemployment rate forecast (see chart).
2. Infrastructure Spending ($1 trillion in spending over 10 years)
• $100 billion in spending => lower unemployment rate 0.3
percentage points compared to base case.
3. Hiring workers for infrastructure projects will put even more upward
pressure on wage inflation.
4. Trump prefers minimum wage determined at state and local level
General Labor Market Trends1. The unemployment rate is expected to fall to 4% in 2018, which is below
full employment by this metric.
2. Wage inflation will accelerate from 2.8% annual rate today, to 3.5% in 2018
when the labor market is at full employment
3. The tightening labor market is now benefiting workers which will support
consumer spending.
4. Payroll employment will growth 1.2% in 2017 and 1.0% for 2018-2020.
5. 2 million jobs will be added in 2017 (170,000 per month), down from the
200,000 pace set in 2014-2015
6. The employment-to-population ratio for prime age workers is now 77.9%,
and is expected to reach the full employment 79.5% figure in late 2017,
pushing wage growth above 3%.
Unemployment Rate
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
Recession
Unemployment
Underemployment (U-6)
Full Employment Target = 5%
Underemployment Target = 9%
Unemployment Rate Forecast
Source: Department of Labor.
77
Average Hourly Earnings will Rise 3% in 2017 as Labor Market Slack Dissipates
Average Hourly Earnings
(Year over Year)
1.25
1.50
1.75
2.00
2.25
2.50
2.75
3.00
10 11 12 13 14 15 16 17 18
Source: Department of Labor.
Marginally Attached to Labor Force
& Part Time For Economic Reasons
Household Survey
0
1
2
3
4
5
6
7
8
9
10
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
(Mil
lio
ns)
0
1
2
3
4
5
6
7
8
9
10
(Mil
lio
ns)
Recession
Marginally Attached to Labor Force
Part Time for Economic Reasons Source: Department of Labor.
88
Improving Credit Quality As Unemployment Falls
CU Net Chargeoff Rate
Versus
Unemployment Rate
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
07:1 08:1 09:1 10:1 11:1 12:1 13:1 14:1 15:1 16:1 17:1
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
0.7%
0.8%
0.9%
1.0%
1.1%
1.2%
1.3%
1.4%Unemployment Rate (Left Axis)
Net Chargeoff Rate (Right Axis)
Source: Department of Labor, NCUA,CUNA
CU Delinquency Rate
Versus
Unemployment Rate
0
1
2
3
4
5
6
7
8
9
10
11
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2Recession
Unemployment (Left Axis)
Loan Delinquency Rate (Right Axis)
0.75% Natural Delinquency Rate (Right Axis)
4.7% Full Employment Target (Left Axis)
99
Rising Deficits Over Next 4 Years
Federal Government Surplus/Deficit(Billions of Dollars)
-269-290-255
-203-164
-22
69126
236
128
-158
-378-413
-318
-248
-161
-459
-1,413
-1,294-1,300
-1,087
-680
-485-438
-590-594
-520
-625
-714
-107
-$1,800
-$1,600
-$1,400
-$1,200
-$1,000
-$800
-$600
-$400
-$200
$0
$200
$400
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
-9%
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
Deficit (LHS)
Deficit-to-GDP (RHS)
-3% Deficit Ratio Limit (RHS) Source: Congressional Budget Office.
Trump’s Fiscal Policies on Deficits1. Trump’s deficit financing of government spending and tax cuts could double the
deficit over the next 4 years compared to the base case deficit forecast (see chart).
2. Increased infrastructure and military spending along with tax cuts will result in large
increases to the CBO forecasted budget deficit (see chart). The deficits will, however,
lead to faster economic growth and inflation in the short run.
3. Trump’s fiscal plan would increase the deficit $5.6 trillion over 10 years, or $560
billion per year, which is a fiscal expansion of 2.5% of GDP per year. This would
take the forecasted deficit-to-GDP ratio from the current 3% to 5.5%.
4. Unified government increase chances of implementing Trump’s policy after years of
political gridlock. Fiscal policy legislative changes only need majority vote in house
and senate.
5. Repatriation of overseas corporate profits => $180 - $250 billion in tax revenues.
6. Economic theory estimates the fiscal multiplier for a $1 increase in government
spending can have a $0.5 to $2.5 cumulative effect on GDP over the next year, if
the economy is operating below potential and the Federal Reserve interest rate
responses are limited.
7. Economic theory estimates the fiscal multiplier for a $1 tax cut for low-to-middle
income households can have a $0.3 to $1.5 cumulative effect on GDP over the next
year.
8. Economic theory estimates the fiscal multiplier for a $1 tax cut for higher income
household can have a $0.1 to $0.6 cumulative effect on GDP over the next year.
9. Deficit financing will increase interest rates because the Federal Reserve will not be
purchasing the debt due to a desire to reduce their balance sheet, and private funders
will be reluctant to purchase new bonds due to low current interest rates and their
expectations for rising inflation. So nominal interest rates are poised to rise due to
rising real interest rates and rising inflation expectations.
1010
Core PCE Inflation Will Approach Fed’s 2% Target
Inflation
Core PCE
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
9596 97989900 01020304 050607 08091011 12131415 161718 1920
Recession
PCE Core
Fed's Target
Source: BEA and BLS
Trump’s Policies on Inflation.1. Increased government infrastructure and military spending will boost
aggregate demand and inflation above the base case forecast (see chart).
2. Trade and immigration restrictions will lead to supply-side constraints and
inflationary pressure.
3. Import tariffs on Mexico (35%) and China (45%) will be inflationary.
4. Trump can raise tariffs without congressional approval, but only for a short
time period and only with limited scope.
5. Rising inflation will entice the Federal Reserve to raise interest rates sooner
and faster than previous estimates.
6. Rising inflation expectations will increase the 10-year Treasury interest rate.
General Inflation Trends1. Rising commodity prices (oil and metals) will push up inflation in 2017.
2. With the economy approaching full employment and potential output, wage
and price inflation will accelerate soon.
1111
Federal Reserve will Raise Fed Funds Interest Rate 0.75 pp in 2018
10-Year Treasury will increase 0.40 percentage point in 2018
Trump’s Policies on Interest Rates1. Trump has stated he will appoint more hawkish Federal Reserve Governors
which will mean short-term rates move higher sooner and faster than
expected.
2. Trump will replace Janet Yellen as Fed Chair with a more hawkish individual
when her appointment runs out in January 2018.
3. The Fed will raise the fed funds rate 0.75 percentage point in 2017 and 2018.
4. The Fed will raise the fed funds rate 1.00 percentage point in 2019.
5. The fed funds rate will reach the 3% “neutral” fed funds rate at the end of
2019. The long run equilibrium fed funds rate is lower today due to slow
productivity and labor force growth.
6. Bigger deficits will increase Treasury interest rates and interest payments.
7. The 10-year Treasury interest rate jumped from 1.76% in October to 2.25%
right after the election, which is a tightening in financial conditions.
8. The 10-year Treasury “term premium” jumped 20 basis points in 2 days after
the election, from -19 basis points to a positive 1 basis point. The term
premium is still significantly below its 20-year average of 1.2%.
9. Interest rate “normalization” has begun.
General Interest Rate Trends1. Strong job growth, accelerating wages, rising inflation and rising
commodity prices will cause upward pressure on interest rates.
Interest Rates and Recessions
0
1
2
3
4
5
6
7
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
0
1
2
3
4
5
6
7
Recession Fed Funds 10-yr Treas Forecast Forecast
12
CU Cost of Funds will Rise with Fed Funds RateCost of Funds
vs Fed Funds Rate
0
1
2
3
4
5
6
7
8
9
10
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21
Cost
of Fu
nds %
0
1
2
3
4
5
6
7
8
9
10
Perc
ent
Cost of Funds
Fed Funds Forecast
Fed Funds
Fed Funds
Forecast
1313
CD and MMA Interest Rates Poised to Rise in 2018
Deposit Interest Rates
versus Fed Funds
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21
Perce
nt
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
Fed Funds
Fed Funds Forecast
CDs
MMAs
Regular Shares
Fed Funds
Forecast
1414
Nominal Interest Rates, Real Interest
Rates and Inflation Expectations
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
07 08 09 10 11 12 13 14 15 16 17
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0Inflation Expectations 10-yr Treas TIPS (10-Yr)
Nominal Interest Rates = Real Rates + Expected Inflation
Rising Inflation Expectations and Real Interest Rates will Push the 10-Year Treasury to 2.5% by Year End 2017
15
Yield on Assets
vs 10-year Treasury Rate
0
1
2
3
4
5
6
7
8
9
10
11
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21
Yield
on A
ssets
%
0
1
2
3
4
5
6
7
8
9
10
11
Perce
nt
Yield on Assets
10-Year Treasury Forecast
10-Year Treasury
CU Yield on Assets will Rise in 2017 as Interest Rates Rise and Loan Growth Remains Strong
10-Year Treasury Rate
Forecast
1616
Vehicle Sales over 17 million in 2018Home Sales will Accelerate to 5.5 million in 2018
U.S. Vehicles SalesSeasonally Adjusted Annual Rate
8
9
10
11
12
13
14
15
16
17
18
19
20
21
07 08 09 10 11 12 13 14 15 16 17 18 19 20
Source: Autodata Corp.
Millions of
Units
8
9
10
11
12
13
14
15
16
17
18
19
20
21
Recession
New Auto Sales
Inherent Demand
Auto Sales Forecast
Existing Home Sales (annual rate)
& Inventories
2,500
3,000
3,500
4,000
4,500
5,000
5,500
6,000
6,500
7,000
7,500
8,000
07 08 09 10 11 12 13 14 15 16 17 18 19 20
Th
ou
sa
nd
s
1,500
1,750
2,000
2,250
2,500
2,750
3,000
3,250
3,500
3,750
4,000
4,250
Th
ou
sa
nd
s
Recession
Sales (Left Axis)
Inventories (Right Axis)
Healthy Housing Market
Home Sales Foecast (Left Axis)
1717
OFHEO House Price Index
(4-Qtr Percent Change)
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
12Recession
U.S.
Seasonally-Adjusted
Purchase-Only Index
High Stock Prices Producing “Wealth Effect” among High-Income HouseholdsHome Prices will Rise 5% in 2018
S&P 500 Stock Index
(monthly average)
0
125
250
375
500
625
750
875
1,000
1,125
1,250
1,375
1,500
1,625
1,750
1,875
2,000
2,125
2,250
2,375
2,500
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
0.0
2.5
5.0
7.5
10.0
12.5
15.0
17.5
20.0
22.5
25.0
27.5
30.0
32.5
35.0
37.5
40.0
42.5
45.0
47.5
50.0
Recession
Nominal S&P Index (Left Axis)
Price-Earnings Ratio (Right Axis)
Real S&P Index (Left Axis)
18
Household Debt(As a Percent of Disposable Household Income)
40%
50%
60%
70%
80%
90%
100%
110%
120%
130%
140%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
40%
50%
60%
70%
80%
90%
100%
110%
120%
130%
140%
Source: BEA & Federal Reserve.
Household Net Worth(As a Percent of Disposable Household Income)
400%
420%
440%
460%
480%
500%
520%
540%
560%
580%
600%
620%
640%
660%
680%
700%
90 91 92 93 94 95 96 97 98 99 00 0102 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
400%
420%
440%
460%
480%
500%
520%
540%
560%
580%
600%
620%
640%
660%
680%
700%
Source: BEA & Federal Reserve.
Household Balance Sheets will be Strong in 2018
1919
U.S. Dollar Exchange Rate
Major Currency Index
Nominal & Real (1973 = 100)
60
70
80
90
100
110
120
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
60
70
80
90
100
110
120
Nominal
Real
Oil Price per Barrel
(West Texas Intermediate Crude)
0
10
20
30
40
50
60
70
80
90
100
110
120
130
140
150
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
0
10
20
30
40
50
60
70
80
90
100
110
120
130
140
150
Recession
Nominal
Real
Rising Interest Rates will Increase Value of DollarLow Oil Prices will Support Deposit Growth in 2017
The U.S. dollar fell 2.26% in July and fell 1.3% over the last 12 months. Market expectations are for the Fed to raise interest rates 0.75% in 2018 which will
increase the value of the dollar. The rise in the value of the dollar will reduce the cost of imports to U.S. residents but raise the cost of exports from the point
of view of foreign buyers. This will worsen the trade deficit and slow economic growth.
A country’s exchange rate partly represents international investors’ confidence in its government policies.
The price of a barrel of oil averaged $45 in June 2017, down from $49 one year earlier, a 8% decrease. This will decelerate energy investment but boost
consumer spending. Oil Economics: Poil = $10 => PGas = $0.25 => growth 0.3% - 0.5% over next two years.
2020
National Savings Rate[3-month moving average (Personal Savings/DPI)]
0
1
2
3
4
5
6
7
8
9
10
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
0
1
2
3
4
5
6
7
8
9
10
Consumer Confidence &
Sentiment Index
0
10
20
30
40
50
60
70
80
90
100
110
120
130
140
150
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
0
10
20
30
40
50
60
70
80
90
100
110
120
130
140
150
Recession
Confidence
Sentiment
Consumers’ Confidence Will Remain High in 2017
The saving rate (savings / disposable personal income) fell to 3.8% in June from 3.9% in May. Savings should decline as households begin spending some of their gasoline savings
windfall. In this environment of modest savings, spending gains will be highly dependent on income growth and consumers preferences for additional savings.
Consumer Confidence Index rose to 121.1 in July from 117.3 in June.
Consumer Sentiment Index fell to 93.4 in July from 95.1 in June.
Improving GDP growth will boost consumer confidence and also the demand for credit.
2121
Expect loan balances to grow 10.8% in 2017 and 9.5% in 2018 as the strengthening economy boosts members’ willingness and ability to accumulate debt
and therefore satisfy some of their pent up demand that was accumulated during the weak and uncertain economic recovery of the last six years. But the loan
growth disparity between small and large credit unions is rather large.
In the last 12 months ending in Q1 2017, credit unions with assets greater than $1 billion reported an 12.7% increase in loan balances versus credit unions
with assets less than $20 million reported loan growth of only 2.5%.
Rapid Credit Union Loan Growth
Credit Union Loan Growth (Annual Percent Growth)
11.5
7.9
7.2
10.310.9
11.7
8.5
7.5 7.7
2.3
-0.4
2.0
5.2
8.0
11.0 10.910.910.8
9.5
5.0
4.0
-2
0
2
4
6
8
10
12
14
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
Credit Union Loan Growth (by Asset size)
3.0
4.0
6.2
7.7
9.5
11.712.5
2.5
4.9
6.2
7.6
9.3
10.5
12.7
0
2
4
6
8
10
12
14
16
< $20 mil $20-$50 $50-$100 $100-
$250
$250-
$500
$500-$1
bil
>$1 bil
Per
cent
Year Ending 2016 Q1
Year Ending 2017 Q1
2222
Provision for loan loss ratios will increase slightly in 2017 due to strong loan growth. But stable loan net charge-offs ratios (0.55%), strong underwriting
standards, an improving labor market, and rising home prices will keep loan loss provisions around the historical average of 0.35%-0.40% of assets. Credit
unions have stabilized their allowance for loan loss account at around 0.9% of loans, down from 1.6% in 2010, but above the 0.7% average reported before
the Great Recession.
Rising Provisions for Loan Loss Ratios
Provisions for Loan Losses (Percent of Average Assets)
-0.31-0.33
-0.35-0.34-0.35-0.39
-0.31
-0.43
-0.85
-1.11
-0.78
-0.50
-0.35
-0.26-0.28
-0.34
-0.40-0.42
-1.2
-1
-0.8
-0.6
-0.4
-0.2
000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Credit Union
Provision for Loan Losses (by Asset size)
19
2425 25
32
36
39
24
21
25
30
35
4546
15
20
25
30
35
40
45
50
< $20 mil $20-$50 $50-$100 $100-
$250
$250-
$500
$500-$1
bil
>$1 bil
Bas
is P
oin
ts
2016 Q1 YTD Annualized
2017 Q1 YTD Annualized
2323
Credit union return-on-asset ratio will rise to 0.75% in 2018. Rising asset yields – due to faster loan growth and modestly higher market interest rates - will
outpace higher funding costs. This will increase net interest margins. But rising provision for loan loss expense, rising operating expenses and falling fee
income will reduce net income.
The disparity between large and small credit unions return-on-asset ratios remained large in Q1 2017. Credit unions with assets exceeding $1 billion
reported ROA ratios of 0.87%, more than twice that reported by credit unions with assets less than $100 million.
Stable Return-on-Asset Ratios
Net Income (Percent of Average Assets)
102
95
107104
95
8582
64
31
18
50
68
84
7780
75 76 75
85
70
80
0
20
40
60
80
100
120
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
Bas
is P
oin
ts
Credit Union Return on Assets (by Asset size)
15
26
37
4853
58
93
12
31
3944
5154
87
0
10
20
30
40
50
60
70
80
90
100
< $20 mil $20-$50 $50-$100 $100-
$250
$250-
$500
$500-$1
bil
>$1 bil
Bas
is P
oint
s
2016 Q1 YTD Annualized
2017 Q1 YTD Annualized
Corporate Stabilization Expense
(basis points of average assets)2009 = 3 bps
2010 = 11 bps
2011 = 18 bps
2012 = 7 bps
2013 = 6 bps
2424
Credit unions should expect membership growth to exceed 4.0% in 2017 due to strong loan growth and job growth. This will push the total number of credit
union memberships to 113.9 million by year end 2017, which is equal to 33% of the total U.S. population. In the last 12 months ending in Q1 2017, credit
union with assets over $1 billion reported 7.2% membership growth, compared with less than 1% for credit unions with assets less than $100 million. The
2,569 credit unions with assets less than $20 million reported a 1.7% decline in memberships.
Membership Growth Surges
Credit Union
Membership Growth (by Asset size)
-1.2-0.8
0.7
2.12.3
5.2
6.6
-1.7
-0.4
0.91.4
3.13.6
7.2
-3
-2
-1
0
1
2
3
4
5
6
7
8
< $20 mil $20-$50 $50-$100 $100-
$250
$250-
$500
$500-$1
bil
>$1 bil
Per
cent
Year Ending 2016 Q1
Year Ending 2017 Q1
Credit Union
Membership Growth (Annual Percent Growth)
2.9
2.32.2
1.8
1.4
1.1
1.41.2
1.61.4
0.6
1.5
2.1
2.5
3.1
3.5
4.1
4.4
3.5
2.5 2.5
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
2525
The Short-Term Debt Cycle and Forecasting Recessions
CU Growth Rate Gap Loan Growth Less Deposit Growth
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
14
16
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
14
16Recession
Growth Rate Gap
Gap Forecast
3.2%
26
Economic Forecast• We expect the U.S. economy to grow by 2.3% in 2017 and 2018. The economy continues to grow at a moderate pace, propelled by
confident consumers, home equity gains, consumer spending and business investment. Projecting into the next year or two, government
spending on infrastructure and potential tax cuts could further boost growth; however, the likelihood of legislative movement on these
initiatives now seems lower. Furthermore, the uncertain political environment, potential trade wars, and proposed changes to healthcare
and immigration may lower growth in the long run.
• Headline and core (excluding food and energy prices) inflation will both be 2.0% in 2017 and 2.3% in 2018. These numbers were
revised down slightly from our previous forecast, as energy and commodity prices continue to fall and wages have grown slower than
expected. Nonetheless, rising employment, consumer spending and wealth will all contribute to continued moderate inflation into 2018.
• The unemployment rate will finish at 4.2% in 2017 and fall to 4.0% in 2018. Strong monthly job gains continue to put downward
pressure on the unemployment rate. As the economy reaches full employment, competition for workers will increase, leading to higher
quality jobs and higher wages, although the adjustments will continue to be gradual. Discouraged workers are likely to re-enter the job
market, off-setting some of the gains in unemployment and wages. However, we expect job growth to remain strong as unemployment
bottoms out around 4.0% next year.
• The Federal Funds interest rate will increase to 1.4% by the end of 2017 and 2.25% by the end of 2018. Increased spending,
tighter labor markets, and looming inflation will cause the FOMC to continue to raise its target interest rate gradually, with another
quarter-point hike this year and further increases of 75 basis points in 2018, if the economy continues on its current path.
• The 10-year Treasury interest rate will continue to increase ending at 2.5% by December 2017 and 3.0% by December 2018.
Although slightly below our last estimates, we expect the 10-year Treasury interest rate to increase gradually as the economy continues
to improve.
2727
Economic Forecast September 2017
5Yr Avg 2016 2017:1 2017:2 2017:3 2017:4 2018:1 2017 2018
Growth rates:
Economic Growth (% chg GDP)* 2.10% 1.90% 1.20% 3.10% 2.10% 2.50% 1.75% 2.30% 2.50%
Inflation (% chg CPI)* 1.30% 2.10% 1.53% 0.06% 3.20% 3.20% 2.00% 2.00% 2.30%
Core Inflation (ex. food & energy)* 1.90% 2.20% 1.57% 1.01% 2.60% 2.70% 2.00% 2.00% 2.30%
Unemployment Rate 6.00% 4.70% 4.50% 4.40% 4.30% 4.20% 4.20% 4.20% 4.00%
Federal Funds Rate (effective) 0.23% 0.54% 0.82% 1.06% 1.25% 1.40% 1.50% 1.40% 2.25%
10-Year Treasury Rate 2.31% 2.45% 2.40% 2.31% 2.32% 2.50% 2.60% 2.50% 3.00%
10-Year-Fed Funds Spread 2.08% 1.91% 1.58% 1.25% 1.07% 1.10% 1.10% 1.10% 0.75%
*Percent change, annual rate. All other numbers are end-of-period values.
Actual Results Quarterly Results/Forecasts Annual Forecasts
28
Credit Union Forecast
• Credit union savings balances will grow by 7.0% in 2017 and 6.0% in 2018. These numbers were revised downward, as the U.S.
savings rate has turned down over the last year. We expected outflows into money market mutual funds, but this might not occur until
late 2017 or 2018.
• Memberships will increase in 2017 by 4.4%. Credit unions continue to see strong increases in membership, due primarily to
recognition of the positive credit union value proposition, particularly in auto lending rates. We expect this number to fall slightly to 3.5%
in 2018, as the auto lending boom slows and indirect borrower memberships decline from loan pay-offs.
• Credit union loan balances will increase by 10.5% in 2017 and 9.5% in 2018. With a stronger economy, we expect increases in
consumer spending and consumer loans. As interest rates rise, fence-sitters will enter the market to lock in low rates. Coupled with all-
time high credit scores across much of the country, we expect strong growth in new auto loans, credit cards and mortgages.
• Credit quality will remain healthy in 2017 and 2018. Although these numbers vary by sector of the economy and region, on average
the improving job market, fast loan growth, and rising wealth will keep delinquencies and charge-offs at relatively low levels.
• Credit union return on assets will decline modestly to 0.80% in 2017 and increase to 0.85% in 2018. Strong loan growth will
continue to sustain interest margins, leading to healthy earnings in 2017 and 2018. However, mortgage refinances are likely to decline
due to increasing interest rates and this will push gains on loan sales lower. Furthermore, higher operating expenses due to a tighter
labor market, higher funding costs, and lower fee income from overdrafts and NSFs will put downward pressure on credit union returns
through 2018. Finally, a share insurance fund dividend (from Corporate Credit Union Stabilization Fund repayment) should add about five
basis points to bottom-line results.
• Net worth ratios will remain relatively stable at 10.9% in 2017 and 10.8% in 2018. The increases are a bit higher than previously
forecasted due to modestly higher earnings outlook and slower asset growth.
2929
Credit Union ForecastSeptember 2017
5Yr Avg 2016 2017:1 2017:2 2017:3 2017:4 2018:1 2017 2018
Growth rates:
Savings growth 5.7% 7.6% 4.4% 0.6% 1.0% 1.0% 4.0% 7.0% 6.0%
Loan growth 8.7% 10.6% 2.0% 3.2% 3.5% 1.8% 1.8% 10.5% 9.5%
Asset growth 6.1% 7.4% 3.5% 0.7% 1.5% 1.5% 4.0% 7.2% 6.0%
Membership growth 3.1% 4.1% 1.2% 1.3% 1.0% 0.9% 0.8% 4.4% 3.5%
Liquidity:
Loan-to-share ratio** 74.5% 79.8% 78.0% 79.6% 81.6% 82.2% 80.4% 82.2% 84.9%
Asset quality:
Delinquency rate** 0.93% 0.83% 0.68% 0.75% 0.76% 0.80% 0.70% 0.80% 0.85%
Net charge-off rate* 0.57% 0.55% 0.58% 0.56% 0.54% 0.54% 0.55% 0.55% 0.60%
Earnings:
Return on average assets (ROA)* 0.81% 0.76% 0.71% 0.81% 0.75% 0.75% 0.75% 0.75% 0.85%
Capital adequacy:
Net worth ratio** 10.8% 10.9% 10.7% 10.8% 10.9% 10.9% 10.7% 10.9% 10.8%
*Annualized Quarterly Data. **End of period ratio. Additional information and updates available on our MCUE website.
Actual Results Annual ForecastsQuarterly Results/Forecasts
30
PRESENTER
S T E V E N R I C K
Chief Economist
CUNA Mutual Group
800-356-2644, Ext. 665-5454