The Return of the Borrower

Less household debt and the improving labor market bode well for CU lending.

June 7, 2013

Credit union loan balances rose 4.4% in 2012, fueled by 9% growth in new-auto loans. Also on the rise were used-auto loans (8.2%), fixed-rate first mortgages (5.9%), and credit cards (4.5%).

This should continue as the economy improves and consumer deleveraging ends—welcome news as credit unions try to grow their return-on-asset ratios to the 20-year average of 1%.

Economic factors portend even faster growth during the next few years, including:

An improving labor market, which has increased many households’ ability and willingness to finance their consumption. In 2012, the U.S. economy created 2.2 million net jobs, up slightly from 2.1 million in 2011.

For the three months ended in February 2013, job creation averaged 191,000 per month. At this pace, the U.S. economy will add another 2.3 million jobs in 2013.

Having more households willing to borrow to fund consumption leads to faster economic growth and more jobs, creating what economists call a feedback loop. This self-reinforcing spiral was a contributing factor to the robust economic growth from 2004 to 2006.

Deleveraging. Americans have been working off a mountain of debt and have improved their balance sheets. The average household debt-to-income ratio fell to 1.05% in the fourth quarter of 2012, down from its peak of 1.29% during the third quarter of 2007—the start of the Great Recession. Economists believe a debt-to-income ratio of 100% is sustainable in the long run.

From 2008 to 2012, total household debt has declined more than $1 trillion. Mortgage debt fell $1.2 trillion during this time, while consumer credit grew $0.2 trillion.

Two-thirds of the overall debt reduction was due to charge-offs, with one-third coming from households paying down debt.

Consumer credit outstanding for all financial institutions rose $16.2 billion in January, according to the Federal Reserve, with total balances up 5.8% during the past year.

This relatively good performance was due mainly to surging auto loans and government-backed student loans. The latter recently surpassed the $500 billion mark, comprising one-fifth of total consumer credit outstanding.

We’re forecasting economic growth to reach 2.5% in 2013, up from 2.2% in 2012, due to surging housing construction, rising home prices, increased auto sales, stronger business investment spending, and a robust energy sector.

Low spending from 2009 to 2011 created pent-up demand for durable goods such as home appliances, furniture, and cars. Cheaper financing and increased access to credit should release much of this pent-up demand in 2013.

We expect credit union loan balances to increase between 5% and 6% in 2013—and even faster in 2014. This will help buoy credit union earnings as funds move out of low-yielding investments and into higher-yielding loans.






STEVE RICK is CUNA’s senior economist. Contact him at 608-231-4285.