The financial health of credit unions depends on the financial health of their members. And the financial health of credit union members depends in large part on how the overall economy and individual local economies are faring. Through the middle of 2017, the overall economy performed well, though there have been a variety of serious localized challenges.
The U.S. economy continued to strengthen over the summer. The manufacturing and energy sectors are bouncing back after a two-year spell of weakness in 2015–2016, and conditions in the agricultural sector are brightening, with net farm income expected to rise this year for the first time since 2013. The national job market is in its best shape in years— the unemployment rate fell to a 17-year low of 4.1 percent in October and the number of job openings is near a record high. Household income is rising and household wealth is at an all-time high, even after adjusting for inflation, thanks to gains in the stock market and increases in house prices. Low interest rates are helping consumers keep their debt payments near a historically low level as a share of income, even as they continue to borrow.
Amidst these signs of economic strength, it is no surprise that consumers are more confident now than at nearly any other time in over a decade. Nor is it a surprise that overall credit union financial performance indicators remain solid. Through the end of the second quarter, credit union loan growth was strong, delinquency rates remained low, system-wide net worth ratios were in double-digit territory, and membership was steadily increasing.
Projections for 2018: Surveys of economic analysts suggest they expect the current economic environment to be maintained in the near term. Economic growth is projected to remain steady at between 2 and 2.5 percent through the end of next year. Employment is expected to increase by roughly 170,000 jobs per month through the rest of 2017 and by about 150,000 jobs per month in 2018. Continued solid job growth will keep the unemployment rate near its current low level. Steady growth, rising employment, and low unemployment are expected to put upward pressure on wages and the price level more generally. This should boost inflation from its current level of around 1.5 percent to the Fed’s 2-percent inflation target by 2019.
In this environment, credit union membership and deposits are likely to rise, borrowing will increase, and credit risk should remain relatively low. However, a stronger economy with low unemployment and rising inflation also sets the stage for higher interest rates.
Short-term interest rates have already started to rise. Federal Reserve policymakers have raised the federal funds target rate in four moves, from a range of 0 to 0.25 percent in late 2015 to its current range of 1.0 to 1.25 percent. Market rates have moved higher in response—the 3-month Treasury rate has increased about 90 basis points since early December 2015 to around 110 basis points at the end of October 2017.
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