Predictions For 2017: How Did We Do?
Early in 2017 we compiled our predictions for the upcoming year. These were a mix of economic and industry predictions. How accurate were these predictions?
As it turns out, we were mostly on the mark in our predictions, at least in terms of direction if not always in magnitude. Here is a review of our 2017 predictions and an assessment of the accuracy of each.
2017 Prediction: Short-term optimism will be tempered by the long-term reality of our environment.
What We Said: It is important to recognize that many of the burdens that have hung over consumers and businesses for the last nine years have not been magically lifted. There remains work to be done. There remains too much debt in the U.S., both public (government) debt and personal debt. The regulatory state has grown too burdensome and is limiting growth. In other words, the optimism that many in the country feel today is likely to ebb somewhat as the year progresses, and only real progress in both the economic and regulatory environments will sustain this optimism.
Assessment: Somewhat pessimistic. The optimism never faded in 2017, with the Dow powering through five separate 1000 point benchmarks over the course of 2017, and small business optimism reaching record levels. The factors behind this optimism – expectations of a revamped tax environment and reduced regulatory burdens – continue to fuel optimism and growth. Despite the correction that is currently occurring in the stock market, we anticipate that long-term optimism will remain reasonably strong.
2017 Prediction: Economic growth will improve in 2017.
What We Said: Regardless of the long-term issues that need to be addressed, we expect economic growth in 2017 to be stronger than it was in 2016. In fact, economic growth is likely to be stronger than in any year since 2005. Several factors are likely to propel this growth. First, the optimism previously cited will be a tailwind. Second, changes in the tax code, especially in the corporate tax rate but also possibly in personal tax rates, will be a stimulant. Finally, a reduction in the regulatory strangulation that has impacted many sectors of the economy will result in accelerated growth. All of these may not happen in 2017, but the expectation that these changes will occur will buoy growth.
Assessment: Overly optimistic. At 2.3% growth in 2017 (using first-estimate data for the fourth quarter), GDP growth in 2017 was only the fifth strongest year since 2005, although much stronger than the average growth over the 2006-2016 period of 1.5%. As has been the case for several years, a poor first quarter growth rate (1.2%) derailed growth for the entire year. Growth in 2017 was stronger than that experienced in 2016 (1.5%). The factors that we cited as stimulants for growth in 2017 (reduced tax rates and an improved regulatory environment) are likely to be impactful in 2018.
2017 Prediction: Housing markets will continue to show improvement.
What We Said: Expectations for 2017 are a five percent increase in home prices. The critical factor behind this positive trend is demography. The migration of the millennial generation into home ownership has begun, and is likely to be an important factor in real estate markets for the next several years.
Assessment: Not optimistic enough. In fact, according to CoreLogic, home prices actually increased 6.6% in 2017. Of the top U.S. metro markets, Las Vegas led the way with 11.2% appreciation, followed by San Francisco at 10.1%. Demography is indeed an important driver of this trend, with Millennials being the key buying segment. So much for Millennials not wanting to own homes, a “trend” commonly cited five years ago.
2017 Prediction: Interest rates will move to “normal” levels.
What We Said: We anticipate two interest rate hikes by the Federal Reserve in 2017. Expect the Fed Funds rate to reach 1.25% by year end. While still low by historical standards, this will be as high as this rate has been since 2008.
Assessment: We predicted two rate hikes; the Fed gave us three. Even though actual economic growth was not as strong as we had predicted, the level of economic optimism coupled with declining unemployment caused the Fed to be more aggressive in their rate increases.
2017 Prediction: The financial regulatory environment will improve markedly.
What We Said: We anticipate that the CFPB will be defanged. The agency is likely to be restructured, moving from a single director to a three or five person board. For credit unions, the NCUA Board is likely to be restructured with Mark McWatters installed as Board Chair. We may also see some movement around the edges on Dodd-Frank. However, we do not expect the repeal of either Dodd-Frank or the elimination of the CFPB. These entities are too deeply insinuated into the fabric of the industry to be easily removed. Moreover, few members of Congress are likely to comfortable eliminating an agency with the words “consumer protection” in its name.
Assessment: Accurate. While the CFPB has not been restructured, it has been defanged to a significant extent, with new Chairman (Mick Mulvaney) adopting a much less aggressive posture regarding the agency’s role. Mark McWatters remains acting chairman of the NCUA. We did not see any actual movement on Dodd-Frank in 2017. Overall, the regulatory environment is much improved at year end 2017 compared to 2016.
2017 Prediction: Deposit competition will increase significantly.
What We Said: Commensurate with the upward movement in rates, we expect the see the awakening of the slumbering depositor. Interest rates have been so low for so long that depositors have simply resigned themselves to low returns on their savings balances, and the competition for deposits in most markets has been relatively muted. We expect this to change in 2017.
Assessment: Accurate. In most markets we did see a discernable uptick in deposit promotions, although rates remain far below long-term norms. Some markets were notably hotter than others, especially those with significant loan growth – and markets with a younger demographic composition.
2017 Prediction: Technological innovation will continue to impact the industry in interesting ways.
What We Said: This is a truism rather than a prediction. And while this discussion could rightly focus on things like mobile banking and mobile payments and the impact on industry revenue streams, it has even larger implications.
Assessment: Without a doubt we are seeing technology impact the industry in significant ways and we will continue to see this in 2018 and beyond. Perhaps the most important technology trend that will happen in 2018 is escalation of use of big data and artificial intelligence.
All in all, our predictions for 2017 tended to be on the mark. If you haven’t seen our predictions for 2018, they are here.