Samira Salem

Strong employment bodes well for loans

Connecting the dots between unemployment rates and loan performance.

July 5, 2018

There's been a lot of buzz about the tightening labor market with the May unemployment level falling to 3.8%—the lowest since 2000—and the consistently healthy pace of job creation over the last year.

Such developments have important implications for credit union operations, including loan growth, delinquency rates, payroll—even credit unions’ ability to attract new talent. Credit union loan growth and unemployment rates tend to move in the opposite directions.

During the Great Recession of 2008-2009, for example, unemployment increased while credit union loan growth decreased. As the economy recovered and more people returned to work, consumer confidence, spending, and demand picked up, and so did credit union loan growth.

When more people work and have more disposable income, demand for goods and services increases, and demand for consumer and business loans rises as well. We expect this trend to continue to fuel strong loan growth over the next year or so.

Not surprisingly, the unemployment rate and credit union delinquency rates are also closely aligned. They tend to move in the same direction. This means that as unemployment increases, credit unions see an increase in loan delinquency because unemployed borrowers find it harder to make their payments on time.

The opposite also holds true: When there are fewer unemployed members, credit union loan delinquency rates fall. In the current context, we expect delinquency rates to remain low.

Usually, a tightening labor market means wages will increase as employers try to attract new workers and retain current staff who have more employment options. But U.S. wage growth has been painfully slow.

Economists are puzzled by this development. They point to a host of factors that might be influencing weak wage growth, including the increased use of noncompete agreements in employment contracts, lower levels of unionization, and slower productivity growth.

At credit unions, slow wage growth means overall payroll growth has been modest, which is good news for operating expense ratios. But slow wage growth may also depress credit union loan growth.

Credit union employee expenses (i.e., salary and benefits) as a percentage of assets since 2009 has increased slightly for large and medium-sized credit unions, although the increase for medium-sized credit unions has been relatively modest.

Despite the contraction in assets that small credit unions have experienced since 2009, this ratio fell for this group. This may be because smaller credit unions are under significantly more operational stress from higher costs associated with meeting regulatory requirements, and they experience weaker earnings relative to larger credit unions.

They also don’t have many cost-saving options, so reducing employee expenses may be one of the few levers they have to relieve some of this pressure. In addition to being slow, wage growth has also been uneven.

A recent report by the Economic Policy Institute confirmed that the top income brackets are seeing some wage growth while middle-class wages are stagnating.

This report also found there are still significant wage gaps based on gender and race: Even for wage earners with relatively similar levels of education, racial and gender disparities persist.

Wage growth challenges are likely to continue. Yet, against this backdrop, credit unions are doing a tremendous job of promoting greater economic opportunity and wage growth via their efforts to support higher education with student loans and through personal financial education.

SAMIRA SALEM is CUNA’s senior policy analyst. Contact her at 608-231-4398 or at