Economy: Moderate Growth Squeezes Spread

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Credit unions made great strides in a very difficult economic environment in 2003. They grew assets, loans and capital while saving members more than $400 million in cash flow through refinances. With an improving economy on the horizon, 2004 will present new opportunities, and challenges for CUs.

Given the significant amounts of fiscal (government spending/tax policy) and monetary (low interest rates) stimuli, U.S. economic growth should be moderately strong in 2004 and through 2005.

Recent government data indicates we are experiencing a long-awaited boost in jobs and business investment, which are key components for a continuing economic expansion. Gross domestic product (GDP) should be at 4.7% in 2004 after experiencing 3% growth in 2003. Inflation will remain tame with the Consumer Price Index (CPI) expected to increase less than 2% in 2004. However, businesses can continue to expect significant increases in the price of health-care benefits.

How will all of this affect credit unions? Rising interest rates will likely compress spreads as deposits re-price faster than loans. CUs can expect slower savings growth as low deposit yields attract little new money. Members trying to catch up with their college and retirement savings funds will shift more dollars into the equity markets. xpect renewed strength in new-vehicle loans as manufacturers back away from financing subsidies. Real estate lending will require greater focus on purchase-money lending as refinancing activity dries up.

Traditional key measures (primarily the capital-to-asset and loan-to-share ratios) of credit union health are forecast to remain strong.

Dave Colby is corporate economist and AVP of CUNA Mutual Group.

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