3. Continued low interest rates
Interest rates are near zero and are likely to stay there for a while.
China’s August currency devaluation and the resulting uncertainty and volatility kept the Federal Reserve on the sidelines in September.
Plus, federal-funds futures market trading activity implies only a 42% probability of a rate hike at the Fed’s December meeting. The probability of a January rate increase stands at 52%.
You need to look all the way out to March 2016 to see the probability of an interest-rate increase above the “toss-up” status. Trading activity reflects a 63% probability of a Fed move at that time.
In any case, it’s important to note that, historically, credit union loans continue to grow for 12 to 15 months after the Fed begins to increase rates. In fact, in two of the past three interest rate cycles the monthly rate of credit union loan growth actually increased for at least a year after the Fed’s initial action.
This reflects the classic “get while the gettin’s good” mentality among those who have not borrowed but feel the need to do so. Once Fed lift-off occurs, most experts expect borrowing costs to increase at fairly regular intervals, and hesitating to buy and borrow early in the cycle means missing out on low-rate deals.
4. Pent-up consumer demand
Many consumers put off big-ticket purchases because of economic uncertainty and fairly weak income gains. This pent-up demand is starting to express itself and should continue to do so throughout 2016.
At year-end 2014, the average age of consumer durable goods was at a 51-year high, according to the Bureau of Economic Analysis (BEA). Among durable goods Americans are keeping for the longest time are household appliances, furniture, furnishings, and home and garden tools such as lawnmowers and snow blowers.
Overall, the average age of durable goods in 12 of 17 broad categories the BEA tracks are at all-time highs. And the remaining five categories remain near all-time highs.
The U.S. Department of Transportation reports that the average age of cars and light trucks was unchanged in 2014 at a record 11.4 years, up from 8.4 years in 1995. You can attribute part of that long-term increase to increases in quality, but that certainly doesn’t account for the entire change.
Overall, automobile sales declined from a consistent annual average of roughly 16 million units during the past economic expansion to just 10 million units in 2009. That sales rate increased each year since that trough, reaching 16.4 million units in 2014 and 17.3 million units in the year ending August 2015.
Still, comparing soft sales in the downturn and subsequent weak recovery to “normal” sales rates prior to the downturn suggests more than 18 million additional cars would have been sold during a status-quo time period. That’s a tremendous sales backlog that bodes well for credit union auto lending.
A durable goods replacement cycle boom will continue to fuel loan growth in the coming months.
5. High consumer confidence
While concerns associated with volatile equity markets are real, the Conference Board Consumer Confidence Index increased 10 points in August, pushing the current reading to 101.5 from 91.5 in July.
Historically, during previous economic expansions the index averaged 100.6. Better job opportunities, higher incomes, and low inflation all play a role in the improved consumer confidence.
Low energy prices, in particular, are helping. Economists estimate that a 1% drop in the price of gas saves consumers $1.4 billion during a year. Businesses that rely on transportation (and, therefore, gas) also benefit from the price drop as prices of their goods fall.
NEXT: Unequal gains