DALLAS – Giving an economic forecast for credit unions would've been a lot easier before Donald Trump's unexpected electoral victory, quipped Bill Hampel, chief policy officer and chief economist with the Credit Union National Association.
Hampel spoke recently during the jointly held National Federation of Community Development CUs' annual conference and the CUNA Community CU conference, and he observed that though there is some uncertainty about how long-term economic trends will play out following the election, there is plenty of concrete data that can help guide credit unions.
The economy, said Hampel, is "in much better shape than people give it credit for," with interest rates poised to start rising, the inflation outlook moderate and the economy approaching full employment. And while there are some external risks, he said, they're "not life-threatening."
One of the big questions in the wake of Donald Trump's election, said Hampel, is how many of the candidate's ideas will come to fruition, particularly those that will require Congressional action. It's "far from clear," said Hampel, if Trump will be able to deliver everything he promised.
Many of the projects Trump and Congress intend to focus on in the early days of the administration relate to infrastructure, which could technically be a more significant economic stimulus than the one passed during the early days of Obama's presidency. The difference between the two, Hampel explained, is that fiscal stimulus stimulates inflation when the economy is approaching full employment, whereas "in the depths of a nasty recession, fiscal stimulus doesn't create inflation but stops the recession from getting worse."
Similarly, he noted that Trump's proposed restrictions on immigration could increase domestic wages and employment, but those benefits will only be short-term. The U.S. faces a long-term labor shortage as baby boomers retire, and with the generation following millennials a much smaller cohort, the country needs immigrant workers to fill jobs and keep the economy going, he said.
Fed's Future?
One question on the minds of credit union leaders is when the Federal Reserve will increase interest rates again – and when the next hike will come after that. The veteran economist pointed out that the U.S. economy was strong enough to raise rates maybe as long as two years ago, but the rest of the world economy – particularly in emerging markets – wasn't strong enough. Continued rate increases next year are almost certainly a given, and Hampel suggested that the Fed could make as many as four moves to raise the fed funds rate.
"A 25 basis-point rate increase in December is likely a done deal now unless something happens in the next few weeks," he said. If the Fed chooses to be particularly aggressive there could it could raise rates at every other one of its eight meetings next year, though Hampel said that he believes three or four increases are probably most likely. The bottom line, he said, is that the more of Trump's economic stimulus that passes, the higher rate will go.
When it comes to household finances, most consumers have technically recovered, said Hampel, even if psychologically they may not be there yet. Home prices have also now reached the level they were at the peak of the housing bubble, and household net worth is at last ahead of where it was prior to the recession.
But Lake Bluff, Ill.-based economist Mike Moebs said his data doesn't align with Hampel's relatively positive outlook. Moebs recently noted that credit union small business lending is still 8.8% ($20 billion) below its all-time high from 2007. Moebs' data also shows an 8.7% decline of loans to assets at all depository institutions since then.
"Community banks and credit unions have been forced to adjust priorities," Moebs said in a statement. "The average community FI has nearly quadrupled compliance personnel, and the required capital to assets has gone from 8% to 10% in the same time period. This has caused main street FIs to shift focus from lending to shrinking balance sheets to address the increase in regulatory costs and higher capital requirements."
Moebs faulted the Fed and Washington for the current situation, claiming that the Fed has "been forced to use monetary policy with no fiscal policy from the White House and Congress" since 2008. Fiscal policy, he went on, "could have reformed taxes and entitlement programs, and introduce new stimulus programs. The Fed failed to help community banks and credit unions with monetary policy alone."
Hampel suggested that significant changes are coming once Trump enters the Oval Office.
"Increasing the rates in the next two months from 25 to 50 basis points will have little effect on the economy, and could even dampen things," he said. "Monetary policy has run its course, and it time fiscal measures are put in place."
CU Forecast
So what should credit unions expect? Hampel predicted that the movement will continue to see loan growth of about 10% through the end of next year, along with delinquencies staying around 7%. Net chargeoffs are also likely to stay stable, though savings growth could begin to decline – an area that's already weak since CUs are paying little to no interest on deposits, he said.
Still, said Hampel, "Six percent deposit growth when you're not paying dividends and inflation is only 1% is actually pretty good."
Credit union net income has hovered around 80 basis points for the last few years, and Hampel said it will likely drop to the high sixties or low seventies by the end of next year as net worth ratios rise and long-term delinquencies and loan losses return to normal patterns.
