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Consumer Spending Down; Outlook for Future Economic Growth Uncertain
Monday, March 3, 2014 6:55 AM

The Commerce Department revised its estimate for fourth quarter growth from +3.2 percent to +2.4 percent. Estimates were lowered on each of the three main components of GDP – consumer spending, government spending and business investment. Of great importance was the revision in consumer spending, which declined from +3.1 percent to +2.4 percent. Consumer spending continues to be the largest component of GDP and key to future, stable growth.

Third quarter growth figures showed the economy grew at a +4.1 percent pace, but consumer spending rose a very modest +2.2 percent. Fourth quarter’s preliminary report noted a +3.1 percent increase in consumer spending, supporting a +3.2 percent economic growth rate, providing optimism to the outlook for the economy. However, as Brian Turner, director and chief strategist with Catalyst Strategic Services points out, that optimism is altered by the fact that the economic growth was much weaker during the fourth quarter than previously thought, and that most of the downward revision comes from weaker consumer spending.

“The fourth quarter revision not only changes the outlook for future economic growth, but it also brings into question the projection for loan demand during 2014,” notes Turner. “Overall demand for the credit union industry is already highly concentrated within its largest peer group ($500 million or greater in total assets), with an expectation that consumer loans must increase significantly during the year to offset the expected decline in real estate loans.”

Despite sharp increases experienced during the first quarter of 2013, vehicle sales have once again been on the decline. Should consumer spending growth remain at prevailing levels, the nation’s GDP has little chance to rise to the +2.5 to +2.7 percent annualized growth rate currently projected, suggesting the industry could see loan growth slip from its 2013 levels, according to Turner.

“This would put additional downward pressure on net interest margins as credit unions see loan revenue decline and fewer originations, as mortgage rates have increased over the past year while consumer loan rates have declined,” says Turner.

“Share growth should mirror 2013 performance, which could increase surplus funds for most credit unions and ultimately investment portfolio assets,” continues Turner. “If share growth were to slow, this would soften the increase in surplus funds.”