CUNA Chief Economist Mike Schenk is “pretty upbeat” about the lending outlook through the second half of 2022.

This is predicated on the idea that the Federal Reserve hasn’t overreacted with its recent aggressive federal funds interest rate increase—that it CAN and WILL orchestrate a “soft landing.” That’s a big assumption: the central bank’s record on that front is not all that great. However, it is important to note that most of the Fed’s missteps have occurred in mature recoveries.

Historically, when the Fed has responded to inflation pressures early in expansions, the economy has continued to grow. For example, in 1992 inflation increased from an approximate 2% year-over-year rate to 4%. The Fed increased rates about 330 basis points in 18 months—but the economy continued to grow for four years. That happened against the backdrop of the Clinton administration's big tax increases and cuts in government spending.

“Today, we have a similar situation and I suspect the combination of pent-up demand and a pretty strong labor market should help to keep loans growing at a rate that's a little above the long-run average,” Schenk says.

CUNA’s most recent quarterly forecast predicts loan growth of 8% in 2022 and 7% in 2023, compared to 7.5% in 2021. Given the Fed’s aggressive move in June, those increases may be reduced modestly in the next forecast—but Schenk expects any reductions in the outlook to be modest.

Some of Schenk’s optimism is due to the expectation that the unemployment rate, currently 3.6%, will remain low through 2023. Wages and salaries are also growing relatively quickly.

“The good news is not only that a relatively healthy level of growth will continue, but that we expect those increases in loan portfolios to be broader based as we look forward,” he says.

Credit union loan growth will broaden out from first mortgages, business lending, and used-auto lending to home equity and new-auto loans, as well as credit cards and unsecured personal loans, Schenk says.

While supply chain issues have led to substantial price increases, the CUNA forecast suggests continued demand for automobiles and houses. These increases are likely to be weaker than in previous economic recoveries, but still relatively decent, broadly speaking. For example, new-vehicle loans declined in 2021, but Schenk expects an increase of 5% to 5.5% in 2022.

First mortgages grew roughly 9.5% in 2021. But with far fewer mortgage refinancings in 2022, first mortgages will grow about 5%. “There was a tremendous amount of mortgage refinancing activity that propelled loan growth forward in 2021,” Schenk says.

"While loan demand should be solid, it’s important to note that unsecured loan growth is accelerating and that tends to be correlated with situations where vulnerable people are inching closer to potential problems,” he continues. “Because it’s unseasoned new growth, we’re not seeing big increases in delinquencies or net charge-offs—but we’re watching that situation closely.”

He believes the U.S. economy will likely sidestep a recession.

“Our forecast for economic growth overall has been lowered markedly compared to our expectations earlier in the year. That’s both because we didn't anticipate the war in Ukraine and because the Fed is more obviously front-loading the interest rate increases we anticipated. In my view, we're on a knife’s edge now—with the probability of recession closing in on 50-50,” Schenk says.

“At the moment, our baseline says that labor markets will continue to reflect a strong showing overall. If that plays out, it should keep the economy on track and will be especially helpful for credit union operations generally and credit union lending in particular.”

» Listen to a CUNA News Podcast episode with Mike Schenk

This article is part of Lending 2022, CUNA News’ special focus on lending innovations, sponsored by Cornerstone Advisors. Follow the conversation on Twitter via #Lending2022.