Executive Summary
- The U.S. economy remains on solid footing, with overall strong labor and housing markets, two key drivers of economic performance. Output growth was weak in the first quarter, but due to anomalous factors, as consumer activity remains healthy. Inflation is still low, thanks to weak energy prices, with little pressure evident in the pipeline. Manufacturing conditions are generally positive but slack persists. Consumer confidence remains high, and incomes continue to grow. Equity market performance has buoyed the wealth effect.
- One of the most important drivers continues to be the policy initiatives proposed by the new administration. However, doubts have surfaced as to whether those initiatives will materialize as quickly as hoped. The administration faces a seemingly endless array of distractions, and they are potentially disruptive.
- The Fed remains in tightening mode, but has slowed the pace somewhat. We still anticipate a funds target of 125-150 bp by year-end. This is unlikely to produce more than a modest increase in market rates, which should be positive for financial institutions. Indeed, the long end of the curve has behaved with considerable restraint.
- Credit unions may still benefit from regulatory relief, though it is unclear at this point just what that may look like. A repeal of Dodd-Frank is unlikely at this juncture, and the Department of Labor rule regarding fiduciary responsibility around retirement accounts will not be delayed, though it will likely be de-fanged, and may be pulled back before the final implementation date of January 2018.
- We anticipate continued strong loan demand based on consumer confidence, a strong labor market, positive housing fundamentals and continued demand for autos, albeit at a slower pace than last year. Share growth may pick up as rates increase. Following the usual first-quarter surge in liquidity, loans-to-shares should increase further as the year progresses.
- In terms of risk assessment, our outlook for the likelihood of interest rates increasing by 100 bp (at the short end of the curve) over the next 12 months is still at 70% based on projected rate hikes. Our outlook for the likelihood of a recession during the same time frame is less than 10%.
For more information about Rochdale Paragon or to obtain a copy of the full report, contact Jeff Owen at (913) 890-8011, jowen@rochdaleparagon.com.