WASHINGTON — Members of the Credit Union Economics Group gave a "modestly pessimistic" forecast this year as a result of the continued slowing of the housing market and increasing energy prices.

The members said they expect overall economic growth, as measured by real gross domestic product, has been reduced from previous forecasts for yearend and 2008 with unemployment creeping up to 5%. Despite a reduction in the expected ARM resets, consumers will be challenged by the overall tightening of credit and slower employment and economic growth.

"We are clearly in a correction phase of this economic expansion," CUNA Mutual Group Chief Economist Dave Colby said. "While our forecast does not indicate a recession in 2008, the chances of economic downturn have increased significantly over the past six months. I would put recession possibilities in the 35% to 40% range, and rising. Consumers are becoming decidedly more cautious with respect to big-ticket spending and taking on new debt obligations."

As such, the group cut its 2008 credit union loan growth outlook by nearly 100

basis points from midyear forecasts and their 2008 share growth outlook was boosted by 110 bps to 6.4%.

"Just glancing into the rearview mirror back to midyear, most credit unions had felt minimal impact from the housing market problems," Kendrick Smith, vice president/chief investment officer of Eastern Financial Florida Credit Union, said. "But the third quarter call report results may indicate a deteriorating trend."

American Airlines Federal Credit Union Senior Vice President and Chief Financial Officer Eli Vazquez recommended that credit unions establish a back-up plan for the challenging times ahead. "Although credit union loan and share growth has remained strong, the weak housing market and high energy prices have a continued dampening effect on growth and members' disposable income," he said. "The Federal Reserve has responded with recent monetary action, but record levels in oil prices and the threat of inflation could limit the Fed's ability to provide significant further stimulus. Most credit unions are well-positioned, but need to be prepared with a Plan B in case the economy weakens significantly."

WesCorp Executive Vice President/Chief Investment Officer Bob Burrell was the optimist of the group seeking opportunities in the challenges. "While the downturn in housing presents serious challenges for the economy, it may offer a number of opportunities for credit unions to both help members with their home financing needs while also increasing their penetration in the residential mortgage market," he commented. "Credit union balance sheets are particularly well-positioned to absorb well-underwritten mortgage loans at a time when the position of many other lenders, including banks and mortgage companies, is not as comfortable."

So far, credit unions appear to be handling the dynamic scenario very well. "Overall, credit unions nationwide appear to be very healthy, without any alarming trends," Bruce Beaudette, president and CEO of Sunmark Federal Credit Union, said. "Growth is generally modest, but not out of line considering a slowing economy. ROA is down from historical levels, but again, this is not a major concern as capital levels are quite strong." He added that he expects ROA to rise with the steeper yield curve.

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