2005′s Economy May Rely Less on Government Stimulus as Rising Short-Term Interest Rates and No New Tax Cuts Create More Volatility, MEMBERS Capital Advisors Reports MADISON, Wis. – As credit unions continue to feel the pinch of tightening margins and try to sustain healthy returns on assets this year, they can also expect the nation's economy to "stand on its own," with much less government-supplied monetary and fiscal stimulus. This, according to the just released 2005 Economic & Market Outlook, published by MEMBERS Capital Advisors, the registered investment advisor affiliate of CUNA Mutual Group. MEMBERS Capital has a slightly less optimistic outlook than the consensus, said John Moreno, client services manager. Rising short-term interest rates and no new tax cuts will create more volatility in the economy and markets during the first half of the year and temper economic growth from the 4%-plus pace of the past 18 months. The negative impact of rates and high oil prices could create periods of sub-3% growth. "Despite that, it's very possible the economy's momentum, propelled by still-low intermediate-term interest rates will offset the restraining forces of oil and high rates. That could very well pave the way for a strong close to the decade, much like we saw in the 1980s and 1990s," Moreno said. One reason for optimism is the strength of U.S. corporations, which are more profitable and healthier financially than they have been in years, according to the report. Rallies in equity and corporate bond markets and a financially sound banking system have significantly lowered the cost of capital. In addition, a weaker U.S. dollar is boosting profit margins of multinational corporations and making American exporters more competitive worldwide. "As corporations restructure, invest in new projects, and return money to investors, they will provide powerful support for the economy in 2005," Moreno said. Conversely, consumers face greater challenges, MEMBERS Capital believes. With baby boomers focusing on retirement and household savings rates at all-time lows, consumer spending will see some "soft spots" in 2005. "However, unless interest rates rise significantly, housing prices decline or geopolitical events intervene, it appears unlikely the consumer will pull back enough in 2005 to seriously restrain economic growth," Moreno said. Another situation MEMBERS Capital believes could negatively affect the economy long-term is the twin deficits – the $430 billion federal budget deficit and the $500 billion merchandise trade deficit. Growing outlays needed to service the budget deficit can "crowd out" more economically productive spending. In addition, the supply of government bonds required to finance the deficit must find buyers, or interest rates will rise, Moreno added. The trade deficit is also a concern because the high level of imports creates an outflow of U.S. dollars that is larger than is needed by foreign purchasers and investors. All else being equal, the U.S. dollar should decline, as it has since 2002, according to the report. That decline could be even more pronounced if foreign interest in U.S. goods and assets declines However, investors could benefit by diversifying beyond U.S. borders, and the dollars decline could produce a more balanced and prosperous global economy. Other key findings from the 14-page report include the following: * The booming Chinese economy provides immense opportunities, but it is difficult to predict that country's regional and global impact in 2005; * The Fed is committed to a campaign of monetary tightening, and short-term interest rates will rise in 2005. The path of longer-term interest rates should be determined by inflationary expectations, which MEMBERS Capital believes will remain moderate; * U.S. stocks may face challenges in 2005 as corporations see their historically high profit margins come under pressure; * Negative geopolitical developments and a rapid rise in interest rates will remain threats to MEMBERS Capital generally positive economic outlook for 2005. [email protected]