CUNA Economic and Credit Union Forecast September 2018

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1 CUNA Economic and Credit Union Forecast September 2018 For Additional Information Contact: Jordan van Rijn Senior Economist Credit Union National Association Telephone:

2 CUNA Economic and CU Forecast September 2018 Change Highlights With second quarter GDP growth of 4.2%, the economy continues to expand at a very strong annualized pace of 3.2%. Unemployment remains at historically low levels, consumer confidence is high, and inflation has hit the Fed s target of 2.0%. Credit unions continue to benefit from the robust economy, as loan and membership growth remain very strong. However, downside risks are beginning to rise to the forefront, including rising interest rates and a growing trade war. The below changes to our forecast reflect a more optimistic short-term outlook for credit unions and the economy, but greater potential for economic headwinds beginning in Specifically, below are the most significant changes in our September 2018 forecast: We increased our 2018 inflation (CPI) forecast from 2.50% to 2.80%. Our 2018 unemployment forecast increased from 3.60% to 3.80%, and from 3.80% to 4.00% for We increased our credit union loan growth forecasts from 9.0% to 9.5% in 2018, and from 7.0% to 8.0% in We also increased our credit union membership growth forecasts from 3.5% to 4.1% in 2018, and from 2.5% to 3.5% in Our delinquency rate forecasts decreased from 0.85% in 2018 and 0.90% in 2019, to 0.75% in 2018 and 0.85% in 2019.

3 CUNA Economic Forecast September 2018 Actual Results Quarterly Results/Forecasts Annual Forecasts 5 Yr Avg :1 2018:2 2018:3 2018: Growth rates: Economic Growth (% chg GDP)* 2.37% 2.20% 2.20% 4.20% 3.00% 3.00% 3.00% 2.25% Inflation (% chg CPI)* 1.30% 2.10% 2.50% 2.90% 2.90% 2.90% 2.80% 2.25% Unemployment Rate 5.60% 4.10% 4.10% 4.00% 3.90% 3.80% 3.80% 4.00% Federal Funds Rate (effective) 0.36% 1.33% 1.68% 1.82% 2.15% 2.40% 2.40% 2.90% 10-Year Treasury Rate 2.26% 2.40% 2.74% 2.80% 3.00% 3.25% 3.25% 3.50% 10-Year-Fed Funds Spread 1.90% 1.07% 1.06% 0.98% 0.85% 0.85% 0.85% 0.40% *Percent change, annual rate. All other numbers are end-of-period values.

4 CUNA Economic Forecast CPI inflation was 2.90% (YOY) in the second quarter, and we expect 2018 CPI inflation to reach 2.80% for the year. The strong economy is finally pushing prices above the Fed s 2.0% target rate: CPI increased 2.90% over the previous year as of July, and core CPI inflation (which excludes volatile food and energy prices) was up 2.20%. The Fed s preferred inflation measure the personal-consumption-expenditures price index (PCE) was up 2.30%, the biggest increase since early We expect this trend to continue through the rest of 2018, which should put the Federal Open Market Committee (FOMC) on track to raise interest rates two more times this year. That would put the target range of the federal funds rate at 2.25% %, and ease inflationary pressures in 2019, when we expect annual CPI inflation to fall to around 2.25%. Unemployment will fall to 3.80% in 2018, up from our previous forecast of 3.60%. As the labor market remains strong and wages rise, many people are entering the labor force and beginning to look for work after waiting on the sidelines. This has prevented the unemployment rate from falling further, but is not necessarily a bad sign since more jobs are still being created. In August, 201,000 jobs were added to the economy, a very strong number and above most economists expectations. The unemployment rate sits at a very low 3.90%, and we expect it to continue to fall and bottom out around 3.80%. While we anticipate labor markets remaining strong, the unemployment rate is likely to rise next year to 4.0% as the economy slows.

5 CUNA Credit Union Forecast September 2018 Actual Results Quarterly Results/Forecasts Annual Forecasts 5 Yr Avg :1 2018:2 2018:3 2018: Growth rates: Savings growth 5.7% 6.0% 3.9% 0.4% 0.8% 0.8% 6.0% 7.0% Loan growth 9.8% 10.0% 1.6% 3.2% 2.4% 2.4% 9.5% 8.0% Asset growth 6.2% 6.6% 2.7% 0.9% 1.2% 1.2% 6.5% 7.5% Membership growth 3.5% 4.1% 1.4% 1.3% 0.7% 0.7% 4.1% 3.5% Liquidity: Loan-to-share ratio** 77.3% 82.8% 81.0% 83.2% 84.7% 85.9% 85.9% 86.7% Asset quality: Delinquency rate** 0.86% 0.81% 0.66% 0.67% 0.70% 0.75% 0.75% 0.85% Net charge-off rate* 0.54% 0.59% 0.60% 0.61% 0.60% 0.60% 0.60% 0.65% Earnings: Return on average assets (ROA)* 0.77% 0.77% 0.90% 0.89% 0.80% 0.80% 0.85% 0.75% Capital adequacy: Net worth ratio** 10.9% 11.0% 10.9% 11.1% 11.1% 11.2% 11.2% 11.1% *Quarterly data, annualized. **End of period ratio. Additional information and updates available on our MCUE website.

6 CUNA Credit Union Forecast At 9.6%, mid-year annualized credit union loan growth remains very strong, leading us to increase our loan growth projections for 2018 and 2019 to 9.5% and 8.0%, respectively. Despite the increasing interest rates, credit union loan portfolios have showed little signs of slowing down. In fact, credit cards and first mortgages have grown as fast or faster than mid-year However, we are seeing slight decreases in the rates of growth for auto loans, HELOCs and second mortgages, and commercial loans, relative to this time last year. Despite four years of average loan growth of over 10.0%, as interest rates continue to rise we expect loan growth to slow to 9.5% in 2018 and 8.0% next year. Credit union memberships are up 4.3% as of June 2018, the fastest pace since before the financial crisis. We expect membership growth of 4.1% this year and 3.5% in As interest rates rise, we expect less demand for new loans, which puts downward pressure on credit union membership growth, particularly for indirect memberships. However, at the same time, rising interest rates create a larger differential between bank and credit union rates, which may cause more people to join credit unions in order to save on interest. Nonetheless, the overall effect will be a slowing of membership growth through 2019, but perhaps not as dramatic a decline as in loan portfolios. Delinquencies fell to 0.67% as of June We expect delinquencies to remain low but increase slightly to 0.75% by the end of 2018 and 0.85% by the end of The strong economy and labor market should maintain delinquencies at relatively low levels. However, two factors are likely to increase payment challenges in the coming years: rising interest rates make monthly payments higher particularly for variable rate loans and borrowers are getting longer into their loan terms especially for auto loans which is often when delinquencies arise.