Economy: Loan Demand will be Moderate at Best, Turner Says

Federal Reserve Chairman Ben Bernanke’s statement regarding the U.S. economy (reported in yesterday’s issue of the LoneStar Leaguer) seems to show a level of frustration that the agency has pretty much launched all of their missiles and is pretty close to be out of ammunition to unilaterally spark any kind of economic recovery through monetary policy, notes Catalyst Strategic Solutions director and chief strategist Brian Turner.

In his statement to the Senate Banking Committee, Federal Reserve Chairman Ben Bernanke acknowledged the pace of economic recovery is again slowing and expects the nation’s unemployment rate to remain relatively elevated for a couple more years.

Recent data suggests economic growth increased at a 2.0 percent pace during the first quarter from the previous quarter’s 3.0 percent, but will grow at an even slower rate in the second quarter. He noted the FOMC based their decisions last month on their expectation of a 1.9 to 2.4 percent growth rate in the GDP this year.

He also noted the recent decline again in the labor market suggests the nation’s unemployment rate, now at 8.2 percent, will only gradually come down admitting for the first time the slowdown in the pace of economic growth cannot be explained away by purely seasonal factors.

Bernanke discussed several steps the Fed would be prepared to take including putting off beyond 2012 its plan to avoid increasing short-term interest rates.

Interest rates, Turner says, are going nowhere for the next couple of years.

“Loan demand will continue to be moderate at best as consumers continue to temper their spending behaviors in light of uncertainty,” says Turner.  “Share growth will not be impacted (as to trends). Unless the employment sector again turns south, delinquencies will be unaffected while liquidity profiles will continue to strengthen.”

While overnight rates at 0.20 percent and investment yields south of 2 percent, Turner says net margins will remain rather tight.

Industry trends from the first quarter will continue through the remaining months of 2012, according to Turner.

“Industry stats show some improvement in earnings and loan growth but it is isolated with the larger credit unions ($500-mil in total assets or greater), which although account for only 5 percent of the number of institutions, control about 65 percent of the assets and equity of the industry,” says Turner.

Challenges will remain with all other institutions.

“This will require a very proactive management of cash flow keeping available funds employed,” stresses Turner.  “It will also require credit unions to retain a relatively low as possible cost of funds management in order to assimilate some form of spread.”