PLANO, Texas-Credit unions should prepare now for a consumer "frenzy" this summer that will be fueled by pent-up demand for durable goods, according to Brian Turner.
Turner, director and chief strategist for Catalyst Strategic Solutions, forecast during a Catalyst-hosted Webcast that consumers will be looking to replace aging cars and appliances. As home values rise and owners once again have equity, they will be looking to tap it to fuel their spending, he added.
Even with this frenzy, in his outlook for 2013 Turner expects GDP growth to remain at a tepid 2.2%.
A recurring theme during the Webcast was the fact conditions have improved from the recession, but are not back to pre-recession levels. Turner noted this occurring in employment, home values, demand for credit and share growth.
"As credit union members feel better about their personal financial situation they will start spending more money," he said.
One bit of good news is all credit unions are benefitting from improvement in loan delinquencies.
Questionable Numbers
Unemployment has come down from 10.1% to 7.8%, but Turner noted there are still questions behind those numbers. The Department of Labor removed 2.2 million people from the workforce, which he said affects the unemployment rate. Turner countered by adding 1.1 million to the workforce to develop what he termed an "adjusted" unemployment rate of 8.5%.
The adjusted unemployment rate still does not account for underemployed persons, which he said makes for a combined unemployed/underemployed rate of 14%.
"Yes, there has been improvement in the employment sector, but it is not sufficient to be a driver in an economic recovery," he assessed. "Household net worth has improved, but not enough to recover what was lost during the depths of the recession. Growth is circular, and all of these factors affect consumer spending behavior."
The challenge going forward for credit unions, in Turner's opinion, is cost of delivery of products.
Turner highlighted lending numbers released recently by NCUA. Credit unions with more than $500 million in assets represent just 6% of total CUs, but they hold 67% of total loans. CUs with $100 million to $500 million in assets make up 15% of CUs and hold 22% of total loans. The $50-million to $100-million category hits 11% of CUs, which hold 6% of total loans. CUs with less than $50 million in assets are 68% of credit unions, but have just 5% of total loans.
According to Turner, some of this concentration has to do with capacity.
"This is a reflection of larger credit unions being more willing to take on a higher level of real estate loans, or they have the capacity to do so," he said. "Another possibility is strategic direction or the nature of the membership. Perhaps membership at smaller credit unions has a smaller demand for real estate loans."
What To Also Watch For
For those who worry about the eventual return of higher interest rates, Turner said the Federal Open Market Committee-after years of vague statements regarding how long rates would remain at historic lows-has set "rising rate" targets. The triggers that will cause the Fed to finally raise interest rates are: an unemployment rate less than 6.5%, current inflation less than 2.5%, and inflation outlook less than 2.5%.
The good news of a slow recovery means it will be difficult for the economy to reach these triggers, Turner said. At current job growth rates, he estimates it will be March 2016 before the unemployment rate reaches the 6.5% level. He foresees slow improvement to employment, slightly better consumer spending behavior and a modest increase in loan demand.
Turner urged credit unions to spot relative value and cash flow stability in their investments.
