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Financial institutions have extended large sums of credit to consumers since 2020. While the total balance of household credit declined continuously between the start of the Great Recession in 2008 until 2013, debt levels started to gradually increase, returning to 2008 levels around the beginning of 2017.
Balances grew by $1.6 trillion over the following three years before the pandemic-induced recession began. As of September 2022, consumer debt is $2.36 trillion higher than at the end of 2019, according to the Federal Reserve of New York.
Driving this massive increase in loans: low interest rates during and after the pandemic recession, the subsequent fastest economic recovery in history, and increased consumer demand. Today, set against a backdrop of conflicting macroeconomic signals, lenders seem apprehensive as they think about the credit market outlook in 2023.
There are macro risks driven by high inflation, tight monetary policy, and a slowdown in economic activity with some chance of recession. On the upside, a record-low unemployment rate, a buffer of excess consumer savings despite a downward trend, and pent-up demand for some consumer goods and services could provide some respite.
It’s not easy to predict with absolute certainty how these factors play out in the near future.
When people worry about an economic downturn, they’re less likely to take out loans due to uncertainty about their future financial stability. Higher interest rates make it more expensive to borrow, and reduced affordability almost always lowers demand for loans.
On the other hand, a strong labor market can boost loan growth. Employed people with steady incomes are more likely to take out loans.
‘There is optimism for credit union loan growth despite expected tight monetary policy conditions and an economic slowdown.’
The net impact on this year’s credit outlook depends in large part on whether the Federal Reserve will succeed in its attempt at a soft landing—reversing inflation without recession. And if it doesn’t, the timing of when the risks outweigh the upside influences consumer demand for credit.
Some forecasts push the timing of recession toward the end of 2023 or early 2024.
CUNA economists project that a recession, although more likely than not, will be mild without large losses in employment compared to previous downturns. The impact on credit union lending will be slower growth compared to last year but increases converging with long-run trends.
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