Utah Credit Union AssociationVolunteers ConferenceFriday, October 21, 2011

The Economy and Its Impact on Credit Unions

Mike SchenkVice President, Economics & StatisticsCredit Union National Association

Telephone: 608-231-4228 Facsimile: 608-231-4924E-Mail: mschenk@cuna.com

Where do we go from here?

1. “Normal” recovery?

2. Sustainable but very slow recovery?

3. Double-dip recession?

4. Depression?

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Recession Fed Funds 10-Yr. Tsy.Source: Federal Reserve & CUNA E&S.

Market Interest Rates1960 to 2011

• 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.

Gross Domestic ProductPercent 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

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Growth rate < -2% => Recession3 months Index increase => Recovery

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-6%

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Recession

6-Month Growth Rate

Leading Index

• Monthly increases in 13 of past 14 months• Stock market = 3% weight• Stocks are a lousy predictor of economic activity

US Employment ChangesThousands - 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 GrowthSource: 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 PricesSource: Oil Price Information Service

• Gasoline + 28% in wake of Arab Spring (Jan to May) but down 13% (51 cents) from late-April 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 ProfitsPercent 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 IndexSource: 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 ExportsPercent 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.

Total Vacant Housing Units For Sale(Thousands)

1,161

1,063

1,1801,1881,141

1,410

1,353

1,1971,2241,214

1,2441,2431,249

1,411

1,3111,2731,261

1,321

1,3751,3881,370

1,481

1,5661,580

1,729

1,935

2,100

2,179

2,0372,074

2,179

2,277

2,169

2,2272,230

2,114

1,916

1,985

2,080

1,9961,968

1,934

2,052

1,945

1,300

1,990

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• 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 little-changed in 2011.

• 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.

Consumer Confidence

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Source: Conference Board.

• 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.

• Duration of unemployment is elevated and near modern-day highs. Over six million have been unemployed for one-half year or more.

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Recessions

Mortgage Debt

Non-mortgage Debt

Source: FRB Flow of Funds -Consumer & Mortgage Debt.

Household Debt(As a Percent of Disposable Household Income)

• 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.

$41 Billion

• 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.

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 ForecastSeptember, 2011

5Yr Avg 2010 2011:1 2011:2 2011:3 2011:4 2011 2012

Growth rates:*Economic Growth (% chg GDP) 0.96% 2.80% 0.40% 1.00% 1.50% 2.00% 1.23% 2.25%Inflation (% chg CPI) 2.10% 1.40% 2.50% 1.50%Core Inflation (ex. food & energy) 2.00% 0.60% 2.00% 1.70% 1.50% 1.25% 1.61% 1.50%Unemployment Rate 6.80% 9.70% 8.90% 9.10% 9.00% 9.00% 9.00% 8.75%Fed Funds Rate 2.50% 0.18% 0.18% 0.10% 0.10% 0.10% 0.12% 0.15%10-Year Treasury Rate 3.91% 3.21% 3.46% 3.16% 2.40% 1.75% 2.69% 2.00%* Percent change, annual rateAll other numbers are averages for the period

Actual Results Quarterly Results/Forecasts Annual Forecasts

                 

CUNA Updated Projections of FDIC and NCUA Assessments For the Ten Years from 2012 to 2021, in basis points of insured shares

FDIC NCUA

FDIC* FICO** TOTAL Corp

Stab. NCUSIF Total NCUA-

FDIC

2012 6.6 1.0 7.6 8.5 0.0 8.5 0.9

2013 6.6 0.9 7.5 9.8 0.0 9.8 2.3

2014 6.6 0.9 7.5 9.4 0.0 9.4 1.9

2015 6.6 0.8 7.4 8.9 0.0 8.9 1.5

2016 6.6 0.8 7.4 8.5 0.0 8.5 1.1

2017 6.6 0.7 7.3 0.0 0.0 0.0 -7.3

2018 6.6 0.7 7.3 0.0 0.0 0.0 -7.3

2019 4.4 0.6 5.0 0.0 0.0 0.0 -5.0

2020 4.4 0.0 4.4 0.0 0.0 0.0 -4.4

2021 4.4 0.0 4.4 0.0 0.0 0.0 -4.4

TOTAL 59.4 6.4 65.8 45.2 0.0 45.2 -20.6

AVERAGE 5.9 0.6 6.6   4.5 0.0 4.5 -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 ForecastSeptember, 2011

5Yr Avg 2010 2011:1 2011:2 2011:3 2011:4 2011 2012

Growth rates:Savings growth 6.3% 4.5% 2.7% 0.7% 0.5% 0.6% 5% 5%Loan growth 4.3% -1.5% -1.2% 0.8% 1.0% 0.9% 1% 3%Asset growth 5.9% 3.3% 2.7% 0.7% 0.5% 0.6% 5% 5%Membership growth 1.3% 0.7% 0.4% 0.2% 0.2% 0.2% 1.0% 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 1.31% 1.75% 1.70% 1.60% 1.40% 1.30% 1.50% 1.20%Net chargeoff rate* 0.83% 1.14% 1.00% 0.90% 0.90% 0.80% 0.90% 0.80%

EarningsReturn 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 websiteIf you have any questions or comments send an email to srick@cuna.coop

Quarterly Results/Forecasts Annual ForecastsActual Results