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Utah Credit Union Association Volunteers Conference Friday, October 21, 2011 The Economy and Its Impact on Credit Unions Mike Schenk Vice President, Economics & Statistics Credit Union National Association Telephone: 608-231-4228 Facsimile: 608-231-4924 E-Mail: [email protected] Where do we go from here? 1. “Normal” recovery? 2. Sustainable but very slow recovery? 3. Double-dip recession? 4. Depression? Market Interest Rates 1960 to 2011 20 19 18 • Gobs of stimulus • Q: What causes recessions? A: Historically recessions have been caused by Fed action to slow a fast-growing economy. The resulting inverted yield curves foretell downturns with a high degree of accuracy. In modern times the US economy has not gone into recession with an accommodative Fed (i.e., a steeply-sloped yield curve.) • 4.6% drop in installment credit in August but prior to that ten consecutive months of increases. YOY growth in August was 2% & five consecutive months of YOY increases. 17 16 15 14 13 (Percent) 12 11 10 9 8 7 6 5 4 3 2 1 0 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 Source: Federal Reserve & CUNA E&S. Recession Fed Funds 10-Yr. Tsy. Gross Domestic Product Percent Changes - $2005. Source: BEA • LT average ~3%; Max. sustainable ~ 3.5%. Recession: two consecutive quarters of contraction. • Obvious 1st quarter soft patch related to Japan, Arab Spring, bad weather, but a marginal increase in 2nd quarter & clear indications of more growth in the 2nd half. • Index of Leading Economic Indicators increased 0.3% in August to 116.2 (2004=100) – pointing to an expanding economy in the coming months. Index of Leading Economic Indicators 10% LEI Index 110 • • • Monthly increases in 13 of past 14 months Stock market = 3% weight Stocks are a lousy predictor of economic activity 8% 100 6% 90 4% 80 2% 70 0% 60 -2% 50 -4% Recession -6% 40 6-Month Growth Rate 30 Leading Index -8% -10% 20 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Growth rate < -2% => Recession 3 months Index increase => Recovery Percent 120 US Employment Changes Thousands - Source: BLS • Private sector jobs +17,000 in September (19th consecutive monthly increase). • New claims for unemployment insurance decreased to 404,000 in the week of Oct. 8th (below the April high of nearly 480,000 but claims above 400,000 are not consistent with labor market recovery) • Average hours worked up 2% compared to last year. Average hourly earnings (cash earnings excluding fringe benefits) were up 0.7% in July & are up 2.3% vs. year-ago. Retail Sales Growth Source: BEA • Monthly gains in 19 of past 22 months. • YOY gains in 22 consecutive months. • Prospect of more growth as auto dealers build inventories – a “virtuous cycle” but confidence is key. • Although affordability is high, pending home sales fell in July & new home sales have declined for three consecutive months. Sales stimulate demand for other goods & services. US Unleaded Gasoline Prices Source: Oil Price Information Service • Gasoline + 28% in wake of Arab Spring (Jan to May) but down 13% (51 cents) from lateApril peak. Rule of thumb: each 1 cent decrease in price puts $1 billion in consumer’s pockets. • WTI crude increased 27% from year-end 2010 to 4/29/11 but has declined by 25% since – now at $86. Rule of thumb (Energy Information Agency): sustained 10% increase = 0.05% to 0.1% decline in GDP. • Recent oil price declines, conclusion of summer driving season and generally soft demand signal additional price declines. Futures markets confirm this view. Growth in Corporate Profits Percent Changes - Source: BEA • 10 consecutive quarterly increases; 8 consecutive YOY increases. • Revenues up an average of 9%. Revenues outpaced nominal GDP growth in each of the past 7 qtrs. All ten S&P 500 sectors recorded revenue growth. • Corporate balance sheets are strong – big cash reserves – poised to respond to any obvious uptick in consumer demand. Business Investment in Equipment & Software Percent Changes - Source: BEA • 8 consecutive quarterly increases; 6 consecutive YOY increases. • Accounted for 40% of GDP growth in past year – 32% in Q2. • Good near-term indicator of productivity growth trends. Remember: GDP growth = labor force growth + productivity growth.) • Fairly good longer-term indicator of labor force growth. ISM Purchasing Managers Index Source: ISM • Readings above 50 represent expansion in manufacturing - 26 consecutive months of expansion • The current reading (51.6) is consistent with an economy that is expanding at a 3.2% pace according to the ISM. • 12 of 18 manufacturing sectors report growth with consistent reports of high demand for export goods. US Exports Percent Changes - Source: BEA • 8 consecutive quarterly increases; 6 consecutive YOY increases. • Accounted for nearly two-thirds of GDP growth in past year & in Q2. • Dollar has fallen • Strong exports fueling strong manufacturing sector. • Elevated vacant homes on market & prospect of additional foreclosure activity virtually guarantees continued price pressure. An additional 2-2.5 million homes are in “shadow inventory” – owned by banks & CUs but held off market. 1,945 1,990 Total Vacant Housing Units For Sale (Thousands) • Overall, 2.9 million US homes received foreclosure filings in 2010 – up 2% compared to 2009. This translates to a record 2.3% of US homes receiving foreclosure filings in 2010 & that level is expected to be littlechanged in 2011. 00 01 02 03 04 05 06 07 08 09 10 11 Consumer Confidence 150 12 125 10 100 8 75 6 50 • 25 • The current 9.1% unemployment rate masks substantial underlying problems. While 14 million are now unemployed there are an additional 9 million underemployed (those wanting but failing to find full-time employment) and roughly 1 million who have dropped out of the labor force. The U-6 unemployment rate – adjusting the data for these underemployed and drop-outs - is approximately 16% today. 4 2 Duration of unemployment is elevated and near modern-day highs. Over six million have been unemployed for one-half year or more. 0 0 80 83 86 89 92 95 98 01 04 07 10 Source: Conf erence Board. Household Debt (As a Percent of Disposable Household Income) 140% Recessions 120% Mortgage Debt Non-mortgage Debt 100% 80% • 60% • 40% Household debt has declined markedly, in part due to deleveraging (pay-downs) and in part due to defaults. However, debt-to-income ratios remain elevated by historical standards. Near-record low interest rates and massive refinancings have translated to lower debt payment burdens. This means that even though debt-to-income ratios are elevated, debt payment burdens are now very close to all-time lows. 20% 0% 79Q1 88Q1 Source: FRB Flow of Funds -Consumer & Mortgage Debt. 97Q1 06Q1 Depository Institution Reserves (Billions – Federal Reserve) $1,800 $1.6 Trillion $1,600 $1,400 $1,200 • The Fed is “pushing on a string” and the economy is in a classic liquidity trap. The banking system is flooded with excess reserves. But consumers, though more able to borrow today compared to the recent past, reflect a strong unwillingness to do so. • Household net worth remains about $8 billion lower than at the start of the downturn – indicating that deleveraging and increases in savings will continue to outpace growth in borrowing activity. $1,000 $800 $600 Total Required Excess $400 $41 Billion $200 $0 Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 Economic Outlook Soft patch - very slow growth to follow Inflation worries take a back seat Unemployment will decline – but very slowly Fed funds flat Very little change in long rates Economic Forecast September, 2011 Actual Results Quarterly Results/Forecasts 5Yr Avg 2010 2011:1 2011:2 2011:3 2011:4 Growth rates: *Economic Growth (% chg GDP) Inflation (% chg CPI) Core Inflation (ex. food & energy) Unemployment Rate Fed Funds Rate 10-Year Treasury Rate 0.96% 2.10% 2.00% 6.80% 2.50% 3.91% * Percent change, annual rate All other numbers are averages for the period 2.80% 1.40% 0.60% 9.70% 0.18% 3.21% 0.40% 1.00% 1.50% 2.00% 2.00% 8.90% 0.18% 3.46% 1.70% 9.10% 0.10% 3.16% 1.50% 9.00% 0.10% 2.40% 1.25% 9.00% 0.10% 1.75% Annual Forecasts 2011 2012 1.23% 2.50% 1.61% 9.00% 0.12% 2.69% 2.25% 1.50% 1.50% 8.75% 0.15% 2.00% Net Worth Ratio Profile (%) 99.0 12.0 98.6 98.0 98.0 11.5 97.0 11.0 96.0 94.7 95.0 10.5 95.0 94.6 10.0 94.0 9.5 93.0 11.4 10.9 9.9 10.1 10.1 92.0 9.0 2007 2008 NW Ratio (right) 2009 2010 Jun 11 Percent of CUs > 7% (left) CU Financial Results Mid-Year 2011 Interest Income - Interest Expense = Net Interest Income 414 96 318 + Fee/Other Income - Operating Expense - Loss Provisions = Net Income 126 316 51 77 CUNA Updated Projections of FDIC and NCUA Assessments For the Ten Years from 2012 to 2021, in basis points of insured shares FDIC 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 TOTAL AVERAGE FDIC* 6.6 6.6 6.6 6.6 6.6 6.6 6.6 4.4 4.4 4.4 59.4 5.9 FICO** 1.0 0.9 0.9 0.8 0.8 0.7 0.7 0.6 0.0 0.0 6.4 0.6 NCUA TOTAL 7.6 7.5 7.5 7.4 7.4 7.3 7.3 5.0 4.4 4.4 65.8 6.6 Corp Stab. 8.5 9.8 9.4 8.9 8.5 0.0 0.0 0.0 0.0 0.0 45.2 4.5 NCUSIF 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total 8.5 9.8 9.4 8.9 8.5 0.0 0.0 0.0 0.0 0.0 45.2 4.5 NCUAFDIC 0.9 2.3 1.9 1.5 1.1 -7.3 -7.3 -5.0 -4.4 -4.4 -20.6 -2.1 * These FDIC assessment rates are for banks in the lowest risk category, essentially those with a CAMELS rating of 1 or 2. A bank with a CAMELS rating of 3 would pay more than double these rates. ** The FICO assessment is a temporary requirement to cover interest on the bonds issued to fund the FSLIC bailout in the early 1990s. The FICO rate is assumed to decay at the same rate is has since 2006 until 2019 when the last of the FICO bonds will mature. Credit Union Forecast September, 2011 Actual Results 5Yr Avg 2010 Growth rates: Savings growth Loan growth Asset growth Membership growth Quarterly Results/Forecasts 2011:1 2011:2 2011:3 2011:4 Annual Forecasts 2011 2012 6.3% 4.3% 5.9% 1.3% 4.5% -1.5% 3.3% 0.7% 2.7% -1.2% 2.7% 0.4% 0.7% 0.8% 0.7% 0.2% 0.5% 1.0% 0.5% 0.2% 0.6% 0.9% 0.6% 0.2% 5% 1% 5% 1.0% 5% 3% 5% 1.0% Liquidity: Loan-to-share ratio** 79.5% 72.2% 69.5% 69.5% 69.9% 70.0% 70.0% 68.7% Asset quality: Delinquency rate Net chargeoff rate* 1.31% 0.83% 1.75% 1.14% 1.70% 1.00% 1.60% 0.90% 1.40% 0.90% 1.30% 0.80% 1.50% 0.90% 1.20% 0.80% Earnings Return on average assets (ROA)* 0.40% 0.39% 0.73% 0.79% 0.70% 0.70% 0.73% 0.75% Capital adequacy: Net worth ratio** 10.7% 10.1% 9.9% 10.1% 10.2% 10.3% 10.3% 10.5% * Annualized Quarterly Data **End of period ratio See also our MCUE website If you have any questions or comments send an email to [email protected]