The Latest Forecast For What's Ahead: 'Protracted Malaise'

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MADISON, Wis.-CUNA Mutual's chief economist, Dave Colby, has a new name for his economic forecast: "protracted malaise."

That forecast is manifested in the June "Trends Report" issued by CUNA Mutual. "Results through June show tepid savings and asset growth. Deposit dollars continue to flow into low-yielding liquid accounts," wrote Colby. "The debt ceiling, the downgrade and the equity market turmoil, could trigger a flight to safety in the near-term. Prepare to manage deposit rates and inflows carefully in the coming months. Total assets finished June at $963 billion, up 4.2% for the year."

The report also found:

• CUs grew loans by $4.8 billion in the second quarter, but the portfolio remains down 0.4% YTD and 0.5% since June 2010. "Don't expect loan growth to improve near-term unless CUs become more aggressive lenders, helping members to take advantage of extremely low rates," said Colby.

• CU membership inched up to 93.1 million, but CUs have added just 500,000 members since June 2010. "We don't see growth improving for at least three years as members consolidate accounts due to pricing."

• The capital-to-asset ratio (10.1%) and the loan-to-share ratio 69.6% remain solid, but assessment payments and "safe haven" deposit inflows will cause declines in both ratios for the next six months.

• The loan delinquency rate (1.566%) is at its lowest level in two years.The number of credit unions has declined by 110 through mid-year 2011, with the total number of CUs at 7,487 on June 30.

• Colby said that a "closer inspection" of the lending detail shows that without the 17% YTD gain in government student loans and the 66% year-over-year increase, the rest of the market would have contracted 5.3%. "CUs are not lagging the market recovery; rather the inclusion of government student loans is biasing trends. The consumer recession is not over."

• In addition, detailed CU data shows that on an annual basis, used vehicles and credit cards are positive. YTD, used vehicle loans were the only positive with total CUCIC down 2.6% through midyear.

• Early results indicate moderately strong 1st mortgage origination activity through mid-year, but extremely low yields on these long-duration assets is preventing CUs from retaining these loans on their books.

In his analysis, Colby found some good news, but it is tempered by other market conditions:"Rarely are CUs presented with back-to-back opportunities to help members manage their finances," said Colby. "Refinancing loans at new lower rates will provide much needed cash flow for member households or help lower overall debt levels. Despite very unattractive yields, CUs can also provide net saver member households with wealth preservation, in these extremely uncertain times.

"Given heightened economic and employment uncertainty, overall consumer demand for financing large purchases will decline," Colby continued. "When this trend is coupled with historically low interest rates, making it easier for manufacturers/dealers to "buy-down" financing rates and CUs wisely not wanting to hold long-term, fixed-rate mortgages, it will be extremely difficult to grow loans. New strategies must emerge for our industry to reignite the core function of CUs."

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