PLANO, Texas — With the economy expected to experience "modest growth" in the second half of the year, credit unions' asset yield should hold during that time.
That's according to Brian Turner, manager of Southwest Corporate Credit Union's Investment Advisory Service. Growth will average between 2.4% to 2.6% for the remainder of 2007, while core inflation will remain somewhat elevated at 2.2% to 2.3%, Turner said.
As expected, the Federal Reserve kept the benchmark target interest rate at 5.25% and reiterated its stance that inflation is the "predominant" risk facing the economy, Turner noted. The late June announcement marked the eighth consecutive meeting, which the FOMC has kept the overnight rate at 5.25% and comes one year since their last increase of 25 basis points. The Federal Reserve's current monetary policy is seeking to provide incentives to stimulate long-term economic growth at a stable pace as to keep inflation in check, Turner said.
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"Credit unions may have noticed that over the first half of 2007, the shape of the treasury yield curve shifted as short-term rates declined 15 to 25 basis points while longer-term rates have risen 30 to 40 basis points," Turner pointed out. "In essence, that has added 67 basis points to the slope of the curve. The two-year treasury note rate, a credit union benchmark for consumer loan and investment yields, has increased 40 basis points to 4.91% from its most recent low of 4.50%."
Even though consumer lending has increased, it has not slowed consumer spending. Consumer spending increased .5% in May matching April's gain. Consumer spending, which accounts for 70% of the economy, has increased at a 5.5% annualized pace over the past 12 months, but Turner says "it will most likely cool as summer heats up."
Meanwhile, consumers have found that new vehicle and fixed-rate mortgage rates have increased during this same period, Turner said. The average 30-year fixed rate has increased 50 basis points to 6.67%. The average new vehicle loan rate is 6.35%, a 30 basis point increase since the end of the year. The form of any dealer price/financing incentive this summer will mean the difference between a 5% or 10% vehicle loan growth rate for many credit unions, Turner said.
"With the prevailing rate outlook, credit union asset yields for the remainder of this year and first-half of 2008 should hold nicely," Turner said. "Recent data shows that although the housing slowdown should continue, we have experienced most of its adverse brunt on the economy. The weak housing sector will moderate real estate growth although a recent upturn in home equity loans will enhance overall growth. Most credit unions have the liquidity and risk profiles to retain more of its mortgage origination."
Turner said liquidity profiles at credit unions "most likely will continue to hold." If credit unions are faced with attracting or retaining shares by increasing rates or members' demand for term share certificates continue to increase, the upward pressure on cost of funds will continue, possibly adversely impacting net margins, he added.
In other news, Southwest Corporate has assembled an array of economists and financial industry experts to explore and explain where the economy is headed. This year's Economic Forum will be on Oct. 16-17 at the Embassy Suites Hotel and Convention Center in Frisco, Texas.
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