Group of CU Economists Sees Slower Loan Growth, Some 'Nest Egg Rebuilding'

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A group of credit union economists is forecasting that 2006 will be healthy for loan growth and that share growth should also begin to pick up some steam.

The Consensus Forecast from the Credit Union Economics Group (CUEG) is "cautiously optimistic" about the U.S. economy in 2006, and does see a set of challenges for credit unions that include slower economic growth, higher interest rates and reduced consumer borrowing.

Dave Colby, chief economist with CUNA Mutual Group, said while overall loan demand will decline, credit unions would have opportunities to help members refinance existing adjustable rate debt. "Credit unions should prepare for slower loan growth in 2006 as higher interest rates reduce the affordability of new debt and increase the cost of servicing existing adjustable rate debt," Colby said.

Credit union loan portfolios are forecast by CUEG to expand 8.2%, down from an 11% pace in 2005. Share growth should accelerate to 5.7%, CUEG projected. Member "nest egg" rebuilding and more aggressive deposit pricing will drive this modest growth rebound.

"With both the loan-to-share and loan-to-asset ratios at high levels, it is prudent at this time for credit unions to review their liquidity contingency plans," said Tun Wai, NAFCU's director of research and chief economist.

CUEG's forecast calls for moderately slower home sales and a reduction in new vehicle sales volumes. Affordability is the big issue driving declines in the housing market.

For credit unions, the "wildcard" in the auto-lending arena is what approach will manufacturers take in 2006 with incentives? More "buy like an employee" promotions will benefit credit union results.

"The Federal Open Market Committee (FOMC) will likely stop its tightening cycle by the third quarter, with the Fed Funds rate ending 2006 at approximately 4.75%," said Jeff Taylor, NAFCU's senior economist. This is consistent with the group's moderate inflation forecast of 2.7% for 2006.

CUEG members include: Bruce Beaudette of Sunmark FCU in Schenectady, N.Y.; Steve Brewer of Macomb Schools and Government CU, Clinton Township, Michigan; Bob Burrell, EVP/CIO with WesCorp in San Dimas, Calif.; CUNA Mutual's Colby; Bruce Fox of Southwest Corporate FCU in Dallas; Kendrick Smith, VP/CIO with Eastern Financial Florida CU in Miramar, Fla., and NAFCU's Taylor, and Tun Wai, Director of Research and Chief Economist with NAFCU.

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