A Review of Raddon Predictions for 2018
Every year Raddon publishes our set of predictions for the upcoming year. Many publications offer predictions. However, we also review the accuracy of our predictions one year later, which makes us somewhat unique in the realm of prognostication.
Here are the predictions we offered up one year ago, along with an assessment of our foresight. Overall, our crystal ball was fairly clear.
2018 Prediction: GDP will continue to grow strongly in 2018.
What We Said: Growth accelerated in the second and third quarters of 2017 and this trend should continue into 2018, although there will be growing concerns. One concern in the economic impact of continued Federal Reserve rate increases. The second is continued softness in automobile sales. Also, approximately midway through 2018 this recovery will officially become the second longest recovery on record, and every recovery does ultimately end. However, count as a tailwind the recently-passed tax cuts. The reduction in corporate tax rates has already contributed to the highest level of small business optimism ever recorded, and that tends to bode well for the economy. All in all, we expect the economy to grow at just less than 3% in 2018. However, we could see some softness creep in late in 2018.
Assessment: On track. Despite a slow first quarter – similar to the last several years (perhaps the Bureau of Economic Analysis might review its seasonal adjustment factors?) – strong growth in the second quarter (4.2%) and third quarter (3.5%) lifted growth for the year. While growth estimates for the fourth quarter are not yet in, expect the overall growth rate for 2018 to be 2.5% to 2.7%.
2018 Prediction: Auto sales will decline further in 2018.
What We Said: In 2017 new auto sales declined by approximately 1.5%, following seven consecutive annual increases since 2009. Prior to this, the longest uninterrupted run of annual increases in auto sales was a five year period from 1996 to 2000. The decline in auto sales will continue in 2018, as we anticipate auto sales to decline by another 2% in 2018. The reasons for this are both cyclical and long-term in nature. The cyclical aspect is the normal credit cycle. The long-term is the fundamental change in driving patterns that we are beginning to see emerge; the impact of things such as Uber / Lyft, autonomous driving vehicles, etc. If you serve urban or densely populated markets you are likely to experience this sooner. The implication for the industry is significant. Much of the growth of consumer lending for both banks and credit unions over the last several years has come through the indirect channel. With declining sales volume, we are likely to experience lower margins, higher dealer concessions, and lower credit quality – leading to higher chargeoffs – in the indirect arena.
Assessment: Pessimistic. We experienced a very modest growth rate of 0.2% in light vehicle sales in 2018, but this was higher than our prediction of a 2% decline. While auto purchases declined by 12.8%, these were more than offset by growth in light truck sales of 7.5%. Aggressive pricing by dealers coupled with continued low rates for financing – despite rate increases by the Federal Reserve – were the major factors in this continued growth.
2018 Prediction: Three rate increases by the Fed.
What We Said: Following the three rate increases the Fed pushed through in 2017, expect an additional three in 2018. There appears to clearly be a bias toward higher rates at the Federal Reserve. Two factors could lessen this likelihood. The first is a flattening of the yield curve. As short term rates rise, if long term rates do not rise commensurately then the yield curve flattens, and flat or inverted yield curves tend to lead to recessions, so the Fed tends to try to avoid flat or inverted yield curves. The second is first-time claims for unemployment. If this number begins to creep up then the Fed may slow the pace of rate increases.
Assessment: Off track. The Federal Reserve was somewhat more aggressive than we anticipated, with four rate increases for the year. The last time the Fed had four rate increases in one year was 2006, in which the rate was increased from 4.25% to 5.25%. Interestingly, this followed eight rate increases in 2005, from 2.25% to 4.25%. We anticipate a significant slowdown in Federal Reserve rate increases in 2019.
2018 Prediction: Real estate values will continue to appreciate but at lesser levels than in 2017.
What We Said: While real estate appreciated by approximately seven percent nationally in 2017, this will ratchet back to an estimated four to five percent in 2018. Continued upward pressure on entry-level home prices will be offset by softness in higher-end homes. This is a result of the significant demographic shifts that are already underway. As Baby-Boomers look to downsize from their generally larger homes, there are not enough Gen Xers to buy these homes. There will continue to be a shortage of entry-level homes.
Assessment: On track. According to CoreLogic, home values appreciated by 4.7% in 2018. This was the slowest year-over-year growth since 2012. Rising interest rates attributed to this slowdown, as this along with rising values reduced home affordability, especially among Millennials.
2018 Prediction: CD portfolios will grow at an accelerated pace.
What We Said: CD portfolios exhibited growth at the majority of financial institutions in 2017. We anticipate this growth will accelerate in 2018. Loan demand has improved in 2017, and this in turn has impacted the hunger for deposits at many financial institutions. This is particularly true for institutions that have been heavily engaged in indirect lending. Coupled with this accelerated growth we will begin to see more innovation in deposit product design – new product twists designed to attract the eye of depositors. Don’t neglect the role of your staff in deposit growth, however. If you are a typical financial institution, very few of your front-line staff have ever even sold deposit accounts competitively, let alone sold them in a rising interest rate environment.
Assessment: On track. While data for the full year is not yet available, for the first nine months certificates of deposit were the fastest growing category of deposits. For example, among credit unions certificate balances grew 6.7% in the first nine months of 2018, the single fastest growing category of deposits. For the first time in many years core deposit growth lagged term deposit growth. Expect this trend to accelerate in 2019.
2018 Prediction: Mobile banking usage will surpass 60% of households.
What We Said: Online banking continues to be the dominant delivery channel used by consumers on a monthly basis, followed by the branch. Currently 57% of consumer households use mobile banking monthly. We expect this to exceed 60% in 2018. Mobile banking will continue to be particularly important to younger generations – 85% of Millennials use mobile banking monthly. More importantly, an increasing number of consumers will be mobile-centric financial consumers, most particularly Millennials and especially the up-and-coming Gen Zers.
Assessment: On track. Since 2016 we have seen mobile banking usage grow at a steady pace, while at the same time the usage of online banking has actually begun to slightly decline. Across the generational segments we have seen nine percent growth of mobile banking since 2016 – with Traditionalists actually showing the strongest growth. In contrast, online banking usage was flat among most generations between 2016 and 2018 except for Baby-boomers, where it declined dramatically. The improved functionality of mobile banking may be playing a role here; consumers may be increasingly comfortable using the mobile device for banking services and reducing online usage accordingly.
2018 Prediction: Branches will contract by 1% in 2018 but branch usage will remain steady among U.S. consumers.
What We Said: Bank and credit union branch growth outstripped population growth every year for the last 60 years – until 2010. Since 2012 we have seen an approximate seven percent decline in financial institution branches. In that period the big banks have been more aggressive in closing branches, with Citibank, Bank of America and PNC leading the way in closing domestic locations. But this reduction is simply an adjustment for massive branch overbuilding that occurred between 2003 and 2008. In the long term branches remain critical to the delivery infrastructure; however, branches will continue to evolve in role and function. Your branch design and staffing plans need to evolve accordingly.
Assessment: Off track. We were correct in the notion that the number of branches would decline, but the decline was greater than 2%, not 1%. Again, the largest banks led the way, with Citibank reducing its domestic locations by over 5% and all the other major banks reducing branch counts by 3% to 4%. The exception was U.S. Bank which reduced branch counts by around 1%. Credit unions continued to grow the branch network in 2019. We expect this trend to continue into 2019 as organizations look for greater efficiency and consumers continue to increase their comfort with electronic delivery of services.
2018 Prediction: Home equity lending opportunities will still exist.
What We Said: Even with the changes in the tax code and the elimination of the tax advantage of equity lines and loans, we anticipate that this category of lending still remains viable. First, existing lines and loans will be more difficult to refinance into the first with the rise in interest rates. Second, equity lending may still offer a better rate for consumer borrowing needs than other lending vehicles due to the secured nature of the loan. This product does not go away but it does have to evolve.
Assessment: On track. In the consumer lending categories, equity lending exhibited the strongest growth rate through the first nine months of 2019. Among credit unions, the growth rate for equity lending through the first nine months was 18%, more than double the rate of auto loan growth (9%) and nearly triple the growth rate for first mortgages (7%). Of course, the impact of changes in the deductibility will first be felt this coming April, so it is possible we may see an impact, but we don’t feel this is likely. For most equity lending users, tax deductibility is important but outweighed by other factors.
All in all, our predictions for 2018 were generally on target and provided a good look forward for the year. Look for our forthcoming predictions for 2019 coming soon.