CUNA Forecasts Slowdown in Second Half

CUNA said it expects the economy will cool down in the second half of the year, as interest rates rise and loan growth slows. But the chances of a recession through 2024 are becoming more remote.

CUNA’s latest forecast also showed credit union asset growth slowing through the end of the year. That in turn would help credit unions keep ROA better than it would otherwise be for the year, despite the other bad news.

“On the economic front our forecast group — which includes seven current and former CUNA economists — puts 33% odds on the possibility of recession over the next 18 months (down from a 53% chance in our April forecast meeting).

“On the other hand, we now think credit unions are likely to experience more serious financial challenges than previously anticipated — with more significant (and longer lasting) liquidity challenges for a significant number of institutions and related stress on bottom-line results,” the CUNA economists wrote in the forecast dated Aug. 15.

The NCUA reported credit unions generated net income that was an annualized 0.81% of average assets in the first quarter, and Callahan & Associates has estimated second-quarter ROA at 0.79%. CUNA forecasted ROA will fall to 0.70% in the third quarter and 0.65% in the fourth quarter.

Combining the first half results with CUNA’s estimates for the second half, ROA for the year would be 0.74%. In 2024, CUNA forecast ROA will fall to 0.65%.

Slower asset growth also helps credit union net worth ratios. CUNA said it expects the aggregate credit union net worth ratio to end the year at 11.0%, an improvement from 10.5% in its April forecast. It said it expects the ratio to rise to 11.2% by December 2024, up from 10.6% previously.

CUNA said key changes in its forecast include:

• An increase in 2023 full-year GDP growth to 2.0%, up from 1.0% in its April forecast.
• A more moderate increase in inflation – with a decline in our current-year inflation forecast from 3.5% to 3.0%.
• Higher market interest rates, adjusting for the Fed’s 25 basis point increase in July and expectations of higher long-term rates.
• More serious funding challenges with savings balances flat in 2023 and growing only 3.0% in 2024, downward revisions from its previous forecast of 4.0% for 2023 and 5.0% for 2024.
• Much slower loan growth – especially in 2024. CUNA revised full-year 2023 loan growth down to 7.0% (from 7.5% previously) and 2024 growth to 4.0% (down from 8.0%). “First mortgage and automobile lending will lag, though we presume stronger increases in variable-rate home equity lines and unsecured loans (personal loans and credit card balances) should occur.”
• Greater deterioration in asset quality with the 60-day-plus delinquency rate ending 2023 at 0.80% and 2024 at 1.00% (up from its previous forecasts of 0.75% for December 2023 and 0.80% for December 2024). “We boosted annual average net charge-offs as well, to 0.60% this year and 0.70% in 2024,” up from its previous forecasts of 0.50% for 2023 and 0.55% for 2024.

The combination of stagnant savings and slowing loan growth led to an increase in the loan-to-savings ratio from 83.7% on June 30 to 87.4% by December 2023 and 88.1% by December 2024. The pre-COVID cyclical peak was 86% in January 2019.

“That means liquidity will continue to be a big issue for many credit unions – driving up funding costs and continuing to garner considerable supervisory scrutiny,” CUNA said.

A key assumption in CUNA’s forecast was that Congress will “play nice” and pass a budget on time.

“We assume that policy makers will pass a federal budget avoiding a harmful shutdown and associated labor market and financial market disruptions,” CUNA said. “Election season is quickly approaching, and the public has little appetite for the trauma of that self-inflicted wound.”

“If that assumption doesn’t hold the forecast turns darker fairly quickly. In any case, dusting off those ‘get me through’ loans you rolled out during previous budget battles might be prudent,” CUNA said.

CUNA also bet on continued resilience in the job sector.

Senior Economist Ligia Vado said Friday’s jobs report supports CUNA’s forecast. The U.S. Bureau of Labor Statistics reported that the U.S. added 187,000 nonfarm jobs in August 2023, and the unemployment rate rose to 3.8% from 3.5% in July.

“August’s employment additions are slightly higher than the consensus economic forecast of 170,000 but support a continued and slow deceleration in the labor market when compared to the average monthly job gains over the prior 12 months of 271,000.

“This is good news for the Federal Reserve efforts of reducing inflation, as it signals that the labor market is cooling off,” she said. “The new labor market statistics also reinforce the policy consensus and CUNA’s economic forecast that there is a strong possibility that the Federal Reserve Bank will pause its aggressive hikes of the Fed Fund rate for the remaining of the year.”