news.cuna.org/articles/108237-cus-hit-the-lending-trifecta

CUs Hit the Lending Trifecta

Five reasons double-digit loan growth will continue for a third straight year.

October 29, 2015

Credit unions’ loans outstanding grew 10% in 2014 and they’re on track to post another double-digit surge in balances this year. More impressively, credit unions may deliver a similar gain in 2016.

Credit unions haven’t seen a trifecta of loan growth at that lofty level in nearly 30 years.

Not surprisingly, the foundation of our upbeat outlook rests on recent economic improvement. And expectations are for more of the same in the coming months.

We expect a continuation of healthy increases in credit union lending into 2016 for at least five good reasons:

1. Solid employment gains

The economy added nearly 250,000 jobs per month on average in the year ending August 2015. In all, 2.9 million new jobs were created during that period.

The unemployment rate declined a full percentage point in the past year and the current 5.1% reading is the lowest in roughly 7.5 years.

The U-6 unemployment rate—which accounts for those who have become discouraged and have dropped out of the labor force, as well as those who are working part time but desire full-time employment—fell even faster, declining from 12% one year ago to 10.3% in August.

Labor market improvements are broad-based both geographically and by industry sector.

For instance, compared with year-ago results in July, unemployment rates are lower or unchanged in 367 of 387 metropolitan areas. That’s 95% of the nation’s metro areas showing improvement.

Each of the sixteen broad industrial sectors tracked by the Bureau of Labor Statistics reflect increases in employment during the past year with one exception: mining and logging, where mining employment specifically fell in response to dramatic decreases in energy prices. Importantly, mining accounts for just 0.5% of total U.S. employment.

The unemployment rate is very close to levels deemed to be “full employment” by most economists. And that means income gains are more pronounced and are outpacing inflation by wider margins.

2. Improving consumer balance sheets

Consumers clearly have the ability to take on more debt. Household net worth stands at an all-time high, even after adjusting for inflation.

All key components of the household balance sheet are improving. According to the Federal Reserve, the value of household nonfinancial assets increased 6.5% in the year ending June 2015, largely due to rising home prices. Nonfinancial asset values are up by more than 7% compared with prerecession levels.

Financial assets, likewise, increased in value by 2% in the 12-month period. And they’re up by more than 30% compared with prerecession levels.

On the other side of the balance sheet, household debt increased by a modest 1.1% during the year ending June 2015, but it’s down by nearly 4% compared with prerecession levels.

The improvement relative to income is even more impressive. Household debt as a percent of disposable income hit an all-time high of nearly 125% in 2007, but has trended down since that time, falling to 96% at midyear 2015, a level last seen in 2002.

In a related development, Fed data also shows that debt payment burdens are at all-time lows.

NEXT: Low interest rates



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



Not all improvements are equal

It’s important to remember that it’s likely not all credit unions will experience our broad expectations for movementwide loan growth.

In general, larger credit unions will continue to reflect disproportionately fast growth in loans while smaller credit unions will see increases not nearly as dramatic as the national averages suggest.

The latest NCUA call report data highlights the disparities.

Overall, credit union loans grew 10.8% in the year ending June 2015. But credit unions with less than $20 million in assets (accounting for roughly 45% of all credit unions) grew only 3.1%, and those with $20 million to $50 million (accounting for roughly 20% of all credit unions) grew 3.7% on average during that period.

In contrast, the nation’s largest credit unions grew 13.3% on average.

MIKE SCHENK is CUNA's vice president of economics and statistics. Contact him at 608-231-4228.