August 28, 2008

Stronger GDP, but for How Long?

By Bruce Six, Senior Vice President - ALM

The Commerce Department reported the Gross Domestic Product (GDP) for the last quarter grew at an annualized rate of 3.3% this morning. This was above the economist expectations of 2.7% and well above the prior quarter growth of 0.9%. This growth was helped by the government stimulus package as American consumers cannot have money in their pockets without compulsively spending it. Another source of strength for the economy was found outside the United States as exports activity was significantly helped by the weak dollar essentially making US products cheaper against other currencies. Exports contributed 3.1% of the reported GDP growth so excluding exports the economy only grew 0.2%. The recent strengthening of the dollar against other currencies coupled with slowing in European countries and Japan indicates that this growth rate should drift lower though the balance of 2008. The government also reported that initial claims for unemployment insurance dropped to 425,000 from 435,000 the prior week. While the drop is good, the number of claims is still well above the average claims number of 321,000 for 2007 indicating that labor markets continue to be weak.

The expected slowing in the economy as export activity and stimulus dwindle and unemployment claims grow would usually prompt the Fed to lower rates and essentially “tap the gas” of the economic engine. The Fed’s job is complicated by the elevated inflation rate. The recent drop in gas prices could prove temporary as we move through September because of the favorable conditions reportedly existing in the Atlantic and Gulf of Mexico that could allow strong hurricanes to develop and disrupt oil drilling platforms in the Gulf and refinery activity along the Gulf coast. Soon to be Hurricane Gustav is being followed by another tropical system that is expected to form this weekend in the Atlantic and expectations are that more storms are to come. Higher gas and food cost causing higher inflation has been widely expected to hold the Fed at the current 2.0% Federal Funds rate through the rest of 2008 for the last few weeks and these reports only reinforce the Fed’s dilemma.

Credit unions have an opportunity to deepen their relationship with their members by telling their story. For the most part, most credit unions are very conservatively run and do not have exposure to the alphabet soup of “creative” investments like SIV’s and CDO’s that the banks have been wrestling with. Even with the resources at Mid-Atlantic we did not invest in these types of structures and accordingly our portfolio continues to perform very well. The most basic thing credit unions offer to members is safety and soundness and this is a message we need to promote to current and potential members. Credit unions also have an opportunity to build the loan portfolio as the banks are forced to curtail lending to deal with their balance sheet risk issues. Even customers with high credit scores are being turned away by banks and ideally credit unions want them to turn to them for their lending needs. Credit unions should not need to loosen credit and underwriting standards to pick up significant loan balances and member loyalty.