Despite Consumer Sentiment, 2 Economists Foresee Better Times

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SAN ANTONIO-Despite a recent consumer survey which found a substantial segment of the public believes the economy is heading straight past a double-dip recession and on to a depression, two CUNA economists say credit unions can expect improvements on their balance sheets in the second half of 2011 and into 2012.

Bill Hampel, CUNA SVP and chief economist, and Mike Schenk, the trade association's VP of economics and statistics, said the skies are not yet blue, but at least they are no longer dark and threatening. At CUNA's America's Credit Union Conference here, Hampel said there is an "underlying momentum" in the economy despite some poor numbers in the past few months. He said conditions are more likely to turn up than return to a recession. As an example of the pent-up demand by consumers, he said the average age of the car on the road is higher than normal.

"Credit unions will see improving net income, mostly from declining loan loss expense," he said. "We expect stable or rising credit union net worth ratios."

Schenk acknowledged there are several declining indicators for credit unions to be worried about, but insisted "the sky is not falling." He said CUNA economists believe the country is just going through a "soft patch."

"Growth, however, will not be what it usually is during an economic rebound," he said. "That means members will not interact with their credit unions as they normally do."

According to Schenk, the credit markets are not "normal" but they no longer are frozen. He believes the housing market is "close to the bottom" in terms of home prices, but warned the recovery in that sector will be long and slow.

On the plus side, Schenk pointed out, retail sales are fairly strong through the first five months of 2011, indicating consumers are regaining some confidence. Inflation is "a little high," but mostly is driven by energy prices, and the cost of a barrel of oil has declined in recent weeks. Those factors should indicate CUs don't have to worry about the Federal Reserve Board raising interest rates in the immediate future.

"At this point employment rules over inflation. I believe the Fed will remain on the sideline until the labor market recovers.

"Overall, things are better today than in June 2010," he added.

Loan Growth Coming-Really

Hampel and Schenk predicted 2% loan growth for credit unions in 2011, followed by 5% loan growth in 2012. They expect continued higher than normal loan delinquencies and losses, but said the bad numbers are falling. Unemployment will continue to decline, although slowly. The Fed Funds rate will rise, but not until 2012. Long-term interest rates will rise sooner, they said.

Hampel foresees "moderate" savings and asset growth, and noted some CUs are "shunning growth" by keeping their interest rates low.

"Delinquency rates at banks are higher than that of credit unions, which indicates an opportunity," he said.

Credit unions did not lose a lot of money as a group in the recession of 2008-09, but they went two years with "essentially no earnings," Hampel assessed. He expects ROA to rebound to 70 basis points in 2011 and 75 BPs in 2012.

"Accounting rules made ROAs look worse than they really were during the recession, and are making them look better than they really are now," he said, referring to CUs benefitting from being able to take money out of bloated loan loss reserves.

Because the economy is improving, Hampel expects the losses in mortgage backed securities to be less than current forecasts. As this means losses for corporates will be less, he has a "gut feeling" the corporate stabilization fund assessments may end by 2017 or 2018, not 2021.

Summarized Hampel, "Things are not looking fantastic, but they are moving in the right direction."

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