1. Utah Economic Update & CU Operations
Utah Credit Union Association
October, 2016 • Park City, UT
Mike Schenk
Vice President, Economics & Statistics
Credit Union National Association
Telephone: Facsimile:

2. Utah Economic Update & CU Operations
Utah Credit Union Association
October, 2016 • Park City, UT
Mike Schenk
Vice President, Economics & Statistics
Credit Union National Association
Telephone: Facsimile:

4. Actual Economic Growth
Oooops….   
Year
Federal Reserve Economic Growth Expectations at Start of Year (Low-High)*
 Actual Economic Growth
2011
3.0% to 3.6%
1.6%
2012
2.5% to 2.9%
2.3%
2013
2.3% to 3.0%
2.2%
2014
2.8% to 3.2%
2.4%
2015
2.6% to 3.0%
2016
2.3% to 2.7% ?
Source: Federal Reserve and Bureau of Economic Analysis. * Federal Reserve growth expectations are presented as the “central tendency” range based on Federal Reserve governor and bank presidents expectations – eliminating the three highest and three lowest projections in each year. Economic growth is measured as year-over-year changes in Gross Domestic Product (GDP) – the dollar value of goods and services produced in the U.S. economy during the period.

5. Created by economist Arthur Okun, the misery index helps determine how the average citizen is doing economically and it is calculated by adding the seasonally adjusted unemployment rate to the annual inflation rate. It is assumed that both a higher rate of unemployment and a worsening of inflation create economic and social costs for a country
Criticism: A 2001 paper looking at large-scale surveys in Europe and the United States concluded that unemployment more heavily influences unhappiness than inflation. This implies that the basic misery index underweights the unhappiness attributable to the unemployment rate: "the estimates suggest that people would trade off a 1-percentage-point increase in the unemployment rate for a 1.7-percentage-point increase in the inflation rate."

6. U.S. Economic Snapshot Modest economic growth
Labor markets nearing full employment
Tame inflation but pressures building
Consumer balance sheets improved
A cautious, plodding Fed
International challenges loom large
Presidential election year
US is a domestic demand-driven economy (70%)
Success at the margin: Small improvements in aggregate measures of success translate to important progress

8. High Quit Rate Reflects Labor Market Confidence
Quits during the month as a Percent of Employees who Worked During or Received Pay for the Pay Period that Includes the 12th of the Month.
(Source: BLS)
Changes in Fed police drive changes in CU ROA:
Federal Reserve Federal Funds rate increases typically lower the spread between short-term and long-term interest rates. Think of the short-term Federal Funds rates (black line) as a proxy for funding costs (i.e., what CUs pay their depositors) and the 10-year Treasury (red line) as a proxy for asset yields. You can see that as the Fed raises rates the spread between funding costs and asset yields declines. That means (all else equal) funding costs are rising faster than asset yields so net interest margins (and ROA) declines.
Note when the fed inverts the yield curve (black line rises above red line) it historically results in the appearance of the grey bars (i.e. – causes recessions). Any time you see an inverted yield curve you should be thinking RECESSION!

9. Real Median HH Income (Source: Census Bureau)
5% increase is largest on record
~$44,000 in 1967

10. Household Income* Lower income: less than two thirds the median
Middle income: between two-thirds and double the median
Upper income: more than double the median
*Pew Research Center. The American Middle Class is Losing Ground. Dec. 9, 2015.

11. MIDDLE CLASS IS LOSING GROUND

12. Economic Well Being
Overall, 9% “finding it difficult to get by” and 22% “just getting by” (76 million Americans)
46% say they would struggle to meet emergency expenses of $400.
22% say they are juggling two or more jobs
31% of non-retired have no retirement savings or pension

13. Basic Concepts BLS Monthly Current Population Survey
People with jobs are employed.
People who are jobless, looking for a job, and available for work are unemployed.
The labor force is made up of the employed and the unemployed.
People who are neither employed nor unemployed are not in the labor force.
The survey excludes people living in institutions (for example, a correctional institution or a residential nursing or mental health care facility) and those on active duty in the Armed Forces.
The survey is designed so that each person age 16 and over (there is no upper age limit) is counted and classified in only one group.
The sum of the employed and the unemployed constitutes the civilian labor force. People not in the labor force combined with those in the civilian labor force constitute the civilian noninstitutional population 16 years and over.
Note: Undocumented/illegal immigrants (11 million all ages/~8 million in labor force) – (~5% of labor force which totals about160 million).
Summit CU note…

14. Labor force =
Employed + Unemployed
Unemployment Rate:
= 4.9%
159.29
Civilian Population =
Participation Rate =
Labor Force/Civ. Population =
= 62.8%
253.63
The participation rate and unemployment rate are economic metrics used to gauge the health of the U.S. job market. The key difference between the two indicators is that the participation rate measures the percentage of Americans who are in the labor force, while the unemployment rate measures the percentage within the labor force that is currently without a job.
Participation Rate Vs. Unemployment Rate A citizen is classified as a member of the labor force if he has a job or is actively looking for a job. The participation rate is the percentage of adult Americans, excluding those incarcerated or otherwise institutionalized, who are members of the labor force. The 21st century has seen a steady decline in labor force participation. In 2000, it was 67%; by 2013, it had fallen to 63%. Many economist argue the labor force decline is the result of low-skilled workers losing their jobs to outsourcing or automation, having no success finding new employment and therefore dropping out of the labor force entirely. For this reason, they feel the participation rate is a more accurate measure of the state of the job market than the unemployment rate, which only considers those in the labor force. An unemployment rate of 5% means only 5 out of 100 workers in the labor force are without jobs, but it does not consider those unemployed workers who have given up looking altogether, even though they want to work.
Picture of the Job Market The participation rate and unemployment rate taken together can provide a more comprehensive picture of the job market. A high participation rate combined with a low unemployment rate is a sure sign of a robust job market. During the late 1990s, the participation rate topped 65%, while the unemployment rate hovered below 5%. Most economists agree this was one of the best periods in modern history for American jobs.

15. CBO, November 2014: Of the 3 percentage-point decline in participation between the end of 2007 and the end of 2013, CBO estimates, about 1½ percentage points was the result of long-term trends, about 1 percentage point arose from temporary weakness in employment prospects and wages, and about one-half of a percentage point was attributable to unusual aspects of the slow recovery.
Average since 1980 = 65.5%
Cyclical Decline?
Structural Issues?
BLS says……
Bureau of Labor Statistics, November 2006: Every year after 2000, the rate declined gradually, from 66.8 percent in 2001 to 66.0 percent in 2004 and According to the BLS projections, the overall participation rate will continue its gradual decrease each decade and reach 60.4 percent in 2050.
Participation rate projected to be 60.9% in 2024:

16. 2016 Est. = 4.8% 2017 Est. = 4.6% Average since 1980 = 6.4%
Goal = full employment (~4.5% to ~5.0%)
If substantially higher => Federal Reserve would typically reduce the FF rate target. If 5% or lower the Fed would typically begin increasing the FF target (fearing that the full employment would cause strong wage gains and spending increases – which would lead to inflation pressures.
Average since 1980 = 6.4%
2016 Est. = 4.8%
2017 Est. = 4.6%

18. Percentage Pt. Declines: ’50 to ’72 = -6.4 ’72 to ’94 = -9.0
Created by economist Arthur Okun, the misery index helps determine how the average citizen is doing economically and it is calculated by adding the seasonally adjusted unemployment rate to the annual inflation rate. It is assumed that both a higher rate of unemployment and a worsening of inflation create economic and social costs for a country
Criticism: A 2001 paper looking at large-scale surveys in Europe and the United States concluded that unemployment more heavily influences unhappiness than inflation. This implies that the basic misery index underweights the unhappiness attributable to the unemployment rate: "the estimates suggest that people would trade off a 1-percentage-point increase in the unemployment rate for a 1.7-percentage-point increase in the inflation rate."

20. Job Vacancy Rate vs. Unemployment Rate
Beveridge Curve
Job Vacancy Rate vs. Unemployment Rate
(Source: BLS)
Changes in Fed police drive changes in CU ROA:
Federal Reserve Federal Funds rate increases typically lower the spread between short-term and long-term interest rates. Think of the short-term Federal Funds rates (black line) as a proxy for funding costs (i.e., what CUs pay their depositors) and the 10-year Treasury (red line) as a proxy for asset yields. You can see that as the Fed raises rates the spread between funding costs and asset yields declines. That means (all else equal) funding costs are rising faster than asset yields so net interest margins (and ROA) declines.
Note when the fed inverts the yield curve (black line rises above red line) it historically results in the appearance of the grey bars (i.e. – causes recessions). Any time you see an inverted yield curve you should be thinking RECESSION!

21. Education Matters!
Higher educational attainment is associated with… …higher participation rate… …lower unemployment rate… …higher wages… …higher expected lifetime earnings… …lower probability of job automation

22. Skills/education gap. Labor Department data shows there were 5
Skills/education gap. Labor Department data shows there were 5.5 million job openings that went unfilled in May, 2016.

23. The participation rate and unemployment rate are economic metrics used to gauge the health of the U.S. job market. The key difference between the two indicators is that the participation rate measures the percentage of Americans who are in the labor force, while the unemployment rate measures the percentage within the labor force that is currently without a job.
Participation Rate Vs. Unemployment Rate A citizen is classified as a member of the labor force if he has a job or is actively looking for a job. The participation rate is the percentage of adult Americans, excluding those incarcerated or otherwise institutionalized, who are members of the labor force. The 21st century has seen a steady decline in labor force participation. In 2000, it was 67%; by 2013, it had fallen to 63%. Many economist argue the labor force decline is the result of low-skilled workers losing their jobs to outsourcing or automation, having no success finding new employment and therefore dropping out of the labor force entirely. For this reason, they feel the participation rate is a more accurate measure of the state of the job market than the unemployment rate, which only considers those in the labor force. An unemployment rate of 5% means only 5 out of 100 workers in the labor force are without jobs, but it does not consider those unemployed workers who have given up looking altogether, even though they want to work.
Picture of the Job Market The participation rate and unemployment rate taken together can provide a more comprehensive picture of the job market. A high participation rate combined with a low unemployment rate is a sure sign of a robust job market. During the late 1990s, the participation rate topped 65%, while the unemployment rate hovered below 5%. Most economists agree this was one of the best periods in modern history for American jobs.

26. At an annual meeting for the American Association for the Advancement of Science last month, computer science professor Moshe Vardi proclaimed robots could wipe out half of all jobs currently performed by humans as early as 2030.
A separate report from Oxford University in 2013 found 50% of jobs could get taken over within the next 10 to 20 years — a prediction backed up in a McKinsey report released last year, which even suggested today's technology could feasibly replace 45% of jobs right now.
Some occupations will likely stay immune from the trend:
Ian Pearson, author and fellow at the World Academy for Arts and Science, recently told Tech Insider that teachers, police officers, and people in management roles should feel secure in keeping their jobs. All three involve some form of complex human interaction that a machine can't replicate (at least not yet). Low-wage employees who perform the kinds of repeated tasks found on assembly lines are the ones most at risk of replacement.
-Chris Weller/Tech Insider 3/10/16.
Administration’s “TechHire” initiative aims to equip young people (ages 17-29) with skills to get jobs in IT field.

28. Trusted Financial Partner Member Challenges = CU Opportunities
Student lending
General financial counseling
Retirement planning
Etc…
Summit CU note…

29. Interest Rate Outlook Short rates: Fed decision data-driven
Rising output, tight labor markets & higher inflation
Global uncertainty
An abundance of caution
Long rates:
Currently about 2.5% below what would be expected
International uncertainty will keep rates low

30. Market Interest Rates & CU ROA
Source: Federal Reserve, NCUA.
Changes in Fed police drive changes in CU ROA:
Federal Reserve Federal Funds rate increases typically lower the spread between short-term and long-term interest rates. Think of the short-term Federal Funds rates (black line) as a proxy for funding costs (i.e., what CUs pay their depositors) and the 10-year Treasury (red line) as a proxy for asset yields. You can see that as the Fed raises rates the spread between funding costs and asset yields declines. That means (all else equal) funding costs are rising faster than asset yields so net interest margins (and ROA) declines.
Note when the fed inverts the yield curve (black line rises above red line) it historically results in the appearance of the grey bars (i.e. – causes recessions). Any time you see an inverted yield curve you should be thinking RECESSION!

31. GDP
2016Q2 1.22
2016Q1 0.83
2015Q4 0.87
2015Q3 1.99

32. Utah Economy Strengths Weaknesses
Young, well-educated population and strong population growth.
Diverse economy protects from U.S. volatility.
Emerging cluster of high-tech services.
Stable government finances.
Emerging dynamic finance industry.
Business-friendly environment.
Weaknesses
Regional reliance on federal government.
Relatively low office space availability.
Source: Moody’s Analytics.

33. Utah Recent Performance
Utah is one of the nation’s strongest performers. Job growth is slowing, but on a year-ago basis it is the second best in the leading West region and nearly twice the national average.
Labor force has reached new heights, but as a result the unemployment rate has been moving higher since late 2015.
Healthcare and finance are notable standouts, adding jobs more quickly than the region and nation.
For the first time in several years, high-wage industries are adding jobs faster than low- and mid-wage industries, and the surge in jobs and income is fueling one of the healthiest housing markets in the country.
Home sales and house prices are rising faster than nationally, and residential construction is at a post-recession high.
Source: Moody’s Analytics.

34. Utah Outlook
Although job growth in Utah will slow over the next year, the state’s economic expansion will remain healthy on the back of Silicon Slopes.
Tourism will be strong and provide UT with additional tax revenue for investment in infrastructure and education.
Manufacturing will soften as aerospace slows, but industry investment will spur hiring later in the decade.
Longer term, favorable demographics and a business-friendly climate will allow UT to remain one of the country’s top performers.
Source: Moody’s Analytics.

35. Utah Outlook
High tech. Silicon Slopes will propel the UT economy forward. Although the state's vibrant high-tech cluster is expanding more slowly than this time last year, tech-related employment is up more than 3% year over year. Anchored by Vivint, Oracle and Adobe, UT is the top tech location for startups thanks to its low taxes, cheap real estate, and deep talent pool with schools such as the University of Utah and Brigham Young University. Two homegrown startups, Qualtrics and Domo, are driving the expansion. High tech also benefits from UT’s unique demographics—a birthrate greater than the death rate and strong in-migration. Coupled with a high quality of life score, this encourages graduates and migrating workers to stay in the state and create startups or work for other tech companies, providing UT with a constant stream of talent. Manufacturing. Manufacturing growth in the state is exceeding expectations largely because of aerospace and medical devices, but the pace of job gains will come back to earth a bit in the near term. Aerospace is punching well above its weight. It employs 5% of the manufacturing workers in the state but has been responsible for 20% of the state job gains in manufacturing this year. Aerospace and medical manufacturing are allowing payrolls in Ogden, Provo, and Salt Lake City to increase at a brisk pace, in contrast to national cutbacks. Aerospace is heavily concentrated around Hill Air Force Base in Ogden, but Provo is home to Duncan Aviation, which is planning to expand the Provo Municipal Airport. Meanwhile, Clinical Innovations, the largest medical device company specializing in products used for labor and delivery, is located in Salt Lake City. Clinical Innovations recently acquired BabyLance, a neonatal safety heel stick, expanding its medical device portfolio to the neonatal intensive care unit. Tourism. Often overshadowed by tech, finance and other industries, tourism is set for a banner year in The state generated $1.1 billion in state and local tax revenue from tourists in 2015, money that is being used for education, infrastructure and tourism. The conditions for tourism to thrive in UT are all present: low gas prices, appreciating home values, rising incomes, modest consumer inflation, and healthy consumer confidence. Employment in tourism and entertainment services surged last year, and to meet increased tourist demand, it is forecast to increase 10% by the end of the decade.
Source: Moody’s Analytics.

37. Recent Utah Employment Trends (Source: BLS and CUNA)

38. Utah Unemployment Rate Trends-By MSA (%)
Source BLS. Not seasonally adjusted.
Metropolitan Area
June 2016 (%)
June 2015 (%)
Change (%)
Logan, UT-ID
3.7
3.3
0.4
Ogden-Clearfield, UT
4.1
3.9
0.2
Provo-Orem, UT
St. George, UT
4.4
0.0
Salt Lake City, UT

39. Utah Home Price Changes
By MSA
Source: FHFA All Transactions Index. NSA.
Metropolitan Area
Year Ending 2nd Quarter 2016
Since 4th Quarter 2007
Logan, UT-ID
7.1%
6.8%
Ogden-Clearfield, UT
4.6%
Provo-Orem, UT
7.6%
0.6%
St. George, UT
5.8%
-15.5%
Salt Lake City, UT
7.7%
4.7%

40. $9.3 Billion Utah: $208.4 Million to members!
~ $185 per member household
$81 Million to nonmembers

41. Credit Union Trends Very strong membership growth Solid loan growth
Low savings growth
Vastly improved asset quality
High earnings
Tremendous variation & continuing consolidation

42. Strong Growth in Memberships (Source: NCUA and CUNA)

44. Solid Loan Growth (Source: NCUA and CUNA)

45. Broad-Based Loan Increases (Source: NCUA and CUNA)

46. But CUs Consistently Outpacing Market
Forecasts
Mortgage Bankers Association
Overall originations: 2016 = +13%; 2017 = -16%
Purchase: 2016 = +11%; 2017 = +11%
Refinance: 2016 = +14%; 2017 = -47%
IHS Automotive
Car & light truck sales: = -1% (17.4 million)
2017 = +2% ( 17.7 million)
But CUs Consistently Outpacing Market

47. Federal Reserve Federal Fund rate increases do not cause an immediate decline in loan growth.
Historically it isn’t unusual for loan growth to increase (for 12 to 15 months) AFTER the initial Fed increase.
Why? Because consumers who have put off purchasing and borrowing will realize more rate increases are on the way and conclude that if they are going to borrow they should do it sooner rather than later (when market interest rates are higher). Note: in the last rate cycle the Fed increased the Federal Funds interest rate target from 1% at mid-year 2004 to 5.25% at mid-year 2006 – a 4.25% increase over two years. FF increased in 0.25% increments for 16 consecutive Fed meetings. This time the increases are expected to again be small (0.25%) but to occur over a longer time – no increases at each and every meeting.

51. Liquidity (Total Loans/Total Savings. Source: NCUA and CUNA)
27-year high!

52. Asset Quality: Delinquency (Percent of Total Loans
Asset Quality: Delinquency (Percent of Total Loans. Source: NCUA and CUNA)

53. Asset Quality: Net Chargeoffs (Percent of Average Loans
Asset Quality: Net Chargeoffs (Percent of Average Loans. Source: NCUA and CUNA)

54. Interest Rate Risk (Net Long Term Assets as a % of Total Assets
Interest Rate Risk (Net Long Term Assets as a % of Total Assets. Source: NCUA and CUNA)
Real estate loans that do not reprice, refinance or mature within 5 years;
Member business loans;
Investments that mature in more than 3 years;
NCUSIF deposit;
Land and building;
Other fixed assets

55. Interest Rate Risk (Source: NCUA and CUNA)
Real estate loans that do not reprice, refinance or mature within 5 years;
Member business loans;
Investments that mature in more than 3 years;
NCUSIF deposit;
Land and building;
Other fixed assets

56. Healthy Earnings (Basis Points of Average Assets
Healthy Earnings (Basis Points of Average Assets. Source: NCUA and CUNA)

57. Operating Expense Ratio (Basis Points of Average Assets
Operating Expense Ratio (Basis Points of Average Assets. Source: NCUA and CUNA)
20-Yr. Avg. = 325

58. CU Employee Expense - % Average Assets (Source: NCUA and CUNA)
Real estate loans that do not reprice, refinance or mature within 5 years;
Member business loans;
Investments that mature in more than 3 years;
NCUSIF deposit;
Land and building;
Other fixed assets
U.S unemployment rate peaked at 10% in October 2009

59. Net Worth Ratio (Source: NCUA and CUNA)
Real estate loans that do not reprice, refinance or mature within 5 years;
Member business loans;
Investments that mature in more than 3 years;
NCUSIF deposit;
Land and building;
Other fixed assets
U.S. Peak value = 11.53% (2006)

60. Average Annual Change in Number of U. S
Average Annual Change in Number of U.S. CUs By Decade (Source: NCUA and CUNA)

61. Average Annual Percentage Change in Number of U. S
Average Annual Percentage Change in Number of U.S. CUs By Decade (Source: NCUA and CUNA)