PLANO, Texas — Consumer spending slowed during the third quarter as private-sector job growth continued to be weak, according to recent analysis from Brian Turner.
Turner, director and chief strategist at Catalyst Strategic Solutions, issued his December Update Tuesday. He said employment reports show improvement, but private-sector job creation is slowing again. Most of recent increase in employment comes from government jobs, he noted.
"The recent 2.6 percentage point decline in the unemployment rate is stimulating only half of the economic recovery previously experienced during comparable declines in unemployment," he reported. "Consumer spending growth at the current 7.0% unemployment rate is lower than spending levels when the unemployment rate was 8.8%."
The initial estimate of third quarter gross domestic product growth came in at +2.8%, but is projected to fall over each of the next three quarters. According to Turner, it is "difficult to see" where the measured strength actually is coming from, other than inventory building, "but it definitely is not from consumer spending, which slowed to +1.4%."
Turner foresees no change in the interest rate outlook he has offered for a few quarters now - little movement in short-term rates but continued volatility in longer-term rates until mid-2015.
He said the current environment continues to provide "marginal" loan spreads "sufficient to absorb perceived interest rate risk from rising rates and protect/balance both current and future earnings."
Yield Curve Steeper
Other analysis by Turner includes a slightly steeper yield curve as short-term rate are up 1 to 2 basis points versus a 5-basis point increase in longer-term rates. Loan and investment spreads are unchanged, which he said means investment and loan portfolios garner a wider spread from nominal rates.
Average 5-year, A-auto paper is 2.79%, while 15- and 30-year mortgage rates are 3.47% and 4.46%, respectively. Turner said this puts vehicle-to-savings spreads wider at 266 basis points and mortgage-to-1-year CD spreads at 355 basis points.
"The value of the yield curve remains within the 3 to 4.5 target range," he said. "The liquidity profile of the credit union determines where in the range it should focus. Liquidity will begin to build again so assessment of redeployment of surplus and 'sense of urgency' based on earnings, risk and liquidity profiles."
Whole loans still provide relative value benefit even in this "low" rate environment, Turner advised. He said the investment target ranges between 3 and 5 years - "the longer the target, the greater use of amortizing structure is recommended as to protect [the credit union's] liquidity profile."
Turner advised credit unions to retain short-term funding duration, as he predicts "little" long-term value to cost of funds by attracting term certificates. He said the strategy credit unions deploy on interest margin should reflect wider spreads as market rates increase as marginal asset yields advance at a faster pace than cost of funds - as long as liquidity profiles remain protected.
"Maintain top tier money market rates no greater than the 1-year CD rate," he said. "Continue to 'flat-line' term CD rates for 2 years, 5 years and beyond."
