Economist Sees Little Improvement In 'O3, Targets 'O4

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Credit unions are in a good position to excel even as the economy sputters, and in the process build mutually profitable relationships with their members, a leading credit union economist told CUs here.

Dave Colby, CUNA Mutual Group's corporate economist, provided a wide-ranging view of the economy, including a conservative forecast for 2003, but a "pent-up" recovery in 2004, to a group of approximately 125 attending the National Association of Credit Union Service Organizations (NACUSO) annual conference.

During his session, "Economically Speaking," Colby said he anticipates approval of a $50-billion tax package in 2003 with most of the effect of it being felt in 2004. He also expects oil prices to fall over the next two years, and consumer and business confidence to rebound somewhat by year-end.

"Though 2003 will be challenging from the standpoint of lending and excess liquidity, opportunities for credit unions are plentiful for helping members repair their balance sheets," he said. "These same opportunities can help credit unions and CUSOs grow their profits."

Colby urged attendees to make members aware of all their credit unions can do for them. "Credit unions have a real advantage in difficult times. Traditional banking practices don't thrive in this cycle. We have face-to-face contact. Tell your member what you can do for them. Don't count on them knowing what to do."

An economist with more than 25 years of experience in the credit union marketplace, Colby made these observations on economic-related issues effecting credit union decision-making:

* Vehicle financing. The new-vehicle market doesn't look strong through 2003. Expect manufacturer discount financing to limit even more opportunities. "The new reality is that financing has become a product feature, just like horsepower or safety features. Used auto sales have been and will continue to be our real source of strength. The best source of loan growth may be existing members' business with other lenders."

Deposit Pricing. Despite nearly all deposit yields being below 3%, expect members to continue seeking the safe haven of insured deposits with return of principle. "It will be critical for credit unions to price deposits wisely and move with the markets," he told CUSO leaders. "Otherwise, they will be dealing with large, unintended inflows and outflows."

* The Fed. In the near-term, the Federal Reserve Board will leave its target rates unchanged. It appears the Fed won't risk stalling a recovery by raising rates. "When rates do move up in late 2003, the route is forecast to be slow and gradual, barring any external shocks," Colby said.

* Consumer installment credit? In the past 10 years total CIC is up 120% and this is after hundreds of billions has been refinanced into first mortgages. The credit union share of this $1.8-trillion market is just 11.2%, even though members represent nearly 30% of the population. "Is this an opportunity," Colby asked. "We can save members millions in interest rates. 'Save me money now and I'll ask what else can you do for me.'"

A unique feature of Colby's session was a review of forecasts submitted by attendees before the conference. The discussion compared Colby's outlook on key interest rates, equity market levels and the credit union marketplace to the group's. In general, attendees had a more optimistic economic outlook, but forecast a more rapid credit union consolidation trend.

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