Bullish 2015 Forecast

Midwest has positive business outlook despite energy setbacks as economy continues upward trend.As the economic crisis of the Great Recession recedes, prospects for community banking in the Upper Midwest continue to look up.."Outside of oil and some components of the ag sector, I think things will continue to go well," said Jim Nowak, vice president, risk management at United Bankers' Bank, Bloomington, Minn. "You're going to have to see normalization of rates. There are no guarantees, but 2015 looks pretty decent once we get past this first quarter. The foundation is set for a pretty good year."."We've had the first quarter in a number of years where loan growth exceeded deposit growth, and I think that's a real positive indicator," added Ben Eskierka, senior vice president and chief investment officer at UBB. "The further removed we are from the economic crisis, the greater the chance that we'll see things improve.".While most predicted a fairly solid year ahead, no one suggested a return to pre-recession highs.."I think 2015 is going to be very strong economically, but when I say strong, I mean strong in terms of the last eight years," said Edmond Seifreid, professor emeritus of economics at Lafayette College, Easton, Pa..Seifried predicted GDP growth between 3 percent and 3.5 percent, and unemployment below 5 percent. Since GDP and employment numbers will come more in line with Fed policy goals, the Federal Reserve will most likely raise rates off of zero.."If we do get interest rates that start to move up, that's going to help community banks on income balance sheets. As short-term interest rates get to rise, that's going to help earnings rise in terms of margins. I think 2015 is going to be the start of a nice set of years for community banks," Seifried said..Energy sector takes a hit….Amid other mostly positive indicators, the recent drop in oil prices has put North Dakota in a bit of a tight spot.."What I've heard from the people in North Dakota is that they can survive for a while on $50 to $60 a barrel. If prices drop below that for an extended period of time, producers wouldn't be able to keep up," said Chris Kuehl, economist and managing director of Armada Corporate Intelligence, Lawrence, Kan.."A lot of people say oil right now is where it should be, but I don't think I buy that. $110 per barrel was overpriced, but $80 to $85 [per barrel] is about right. Below is too cheap; above that is market hysteria," Kuehl said..If this glut had happened four or five years ago, when the production in North Dakota was just getting started, it would have been more problematic, Kuehl said. Since the industry there is established and investments have been sunk into the Bakken area, this setback will most likely weed out the smaller players without shutting down production substantially..The drop is a double-edged sword, Seifreid said, negatively impacting some sectors while bringing relief to others..…But consumers benefit.Lower gasoline prices, while unfortunate for the energy sector and related industries, have freed up consumer funds for other expenses. Households in the Ninth Federal Reserve District will have an additional $70 to $80 a month in disposable income, according to Ninth District Regional Economist Toby Madden. Nationwide, every one-cent-per-gallon decrease in cost frees up about $1 billion in consumer spending, according to James Chessen, American Bankers Association chief economist..That extra cash may not only result in a consumer spending spree; Chessen attributes a recent lowering of delinquency rates at least partially to lower fuel costs. "The fact that gas prices are way down has to be a contributing factor in improving delinquency trends," Chessen told the American Banker. "The less money you have to put into your gas tank, the more money you have to do other things, and one of those things is to pay back your debts.".Delinquency rates fell on seven out of 11 types of loans in the third quarter of 2014, according to the ABA Consumer Credit Delinquency Bulletin. The bulletin's composite ratio, which tracks delinquencies in eight closed-end installment loan categories, dropped to 1.51 percent of all accounts, well below the 15-year average of 2.30 percent..The housing market also has continued its slow but steady improvement. Delinquencies in property improvement loans and home equity loans both fell, although they rose very slightly for home equity lines of credit, to 1.52 percent.."Increased home prices have eased pressure on consumers, but stresses can still occur, particularly as home equity lines reach the fully amortizing period and payment requirements rise," Chessen said. In the Ninth District, the housing recovery continues although it has begun to moderate, with the number of permits issued for new housing units leveling out over the past two years..Hiring difficulties won't dampen business prospects.Unemployment numbers continue to improve, although this has led to a tightening in the labor market. Small businesses in the Midwest – and in general – report a desire to hire, but a lack of qualified candidates. A December Small Business Economic Trends survey from the National Federation of Independent Businesses reported that 53 percent of NFIB members were looking to hire, but 43 percent could find few or no qualified candidates. Reports from the Minneapolis Fed also showed a lag between the need for adequately skilled employees and the current pool of potential workers.."Small businesses don't have the luxury to carry someone for three years until they acquire the skills," Kuehl said. "It's been there for a while in construction and other sectors, and now it's moving into the service industry. Some places are even finding it difficult to find an administrative assistant.".This discrepancy often leads to a bump in wages in an attempt to draw in desirable hires, but so far that hasn't happened, said Rob Grunewald, Ninth District economist at the Fed. "While there are some signs that employers are starting to offer higher wages to attract workers to their companies, overall gains in wages and expectations for wage growth were tempered," Grunewald said..Despite hiring difficulties, businesses generally head into 2015 with a positive outlook and improved credit prospects. Nearly 90 percent of respondents to a Ninth District survey reported they are somewhat optimistic or very optimistic about the year ahead, up from 74 percent last year..Business leaders across the Ninth District saw higher productivity last year, and a majority of respondents to a Ninth District survey said they expect capital investments at their firms to increase in 2015. Nineteen percent of respondents also reported improved access to credit while only 4 percent noted worsening access..Kuehl said he expects businesses will see more value in a bank's services and relationship in 2015, especially medium-sized businesses. It will begin to matter again and will affect pricing because businesses that have gone through a rough patch understand service. They understand now that the banker is on their side, Kuehl said..Medium-sized businesses that have weathered the recession will be more loyal to their bankers because they've realized the value of a banker who will sit down and show them what to do, Kuehl said..The relationships community bankers have already made will be a focus of growth rather than newer relationships, commented Eskierka..Flattening yield curve could cause problems.Economic sluggishness abroad will have a negative impact on manufacturers and producers dependent upon exports, as well as possibly contributing to a flattening of the yield curve, several economists said.."As international investors look for higher yields, and the economies of Europe and Asia stall, and their interest rates drop, more and more funds will be invested in the United States, which will drive up prices for fixed income securities and lower [the] yield on the long end of the curve," Seifried said.."This time last summer, the 10-year part of the curve was close to 3 percent and now we're under 2 percent," Nowak said. Despite that fact, Nowak remains optimistic about the year ahead.."I will say, this is the first time I've been even mildly bullish on the U.S. economy in the last seven years. The things I've been following, the models I use, have started showing positive signs after a really long time," Nowak said.."I'm inviting bankers to ignore these ancillary things because we're clearly in a transition phase," Nowak said. "As long as we don't have a blow-up in Europe and the oil prices don't continue so badly, 2015 is going to be pretty decent. How deep this goes, how long it persists will have an impact, but into summer and late 2015 I see things leveling out for the United States."