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Schenk: Five Factors Fueling CU Loan Growth
Friday, November 20, 2015 6:40 AM

Pent-up demand, labor market improvements drive increase

Credit unions’ loans outstanding grew 10 percent in 2014 and are on track to post another double-digit balance surge this year. More impressively, credit unions might deliver a similar gain in 2016. That’s the word from Mike Schenk, CUNA’s vice president of economics and statistics, who addressed the CUNA Lending Council Conference Monday afternoon in Fort Lauderdale.

Schenk cited five reasons to expect continued strong loan growth:

  1. Continued labor market improvement.
    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 to 5.1 percent, the lowest mark in roughly seven years. Labor market improvements are broad-based, both geographically and by industry sector.
  2. Greatly improved consumer balance sheets.
    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 percent in the year ending June 2015, largely due to rising home prices. Nonfinancial asset values have increased by more than 7 percent compared with prerecession levels. Plus, household debt increased by a modest 1.1 percent during the year ending June 2015, but it’s down by nearly 4 percent compared with prerecession levels.
  3. More cheap credit.
    Interest rates are near zero and won’t increase much over the next year. China’s August currency devaluation and the resulting uncertainty and volatility kept the Federal Reserve on the sidelines in September. A strong jobs report in October, however, might spur the Fed to raise rates earlier than anticipated. Schenk said there’s a 72 percent probability of a rate hike at the Fed’s December meeting. Schenk predicts the federal funds rate will be 1 percent at year-end 2016. But don’t expect that increase to put a damper on loan demand right away.

    “Historically, credit union loans continue to grow for 12 to 15 months after the Fed begins to increase rates,” Schenk said. “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.”
  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 throughout 2016. The U.S. Department of Transportation reports that the average age of cars and light trucks in 2014 remained at a record 11.4 years—the same as the previous year, but up from 8.4 years in 1995. 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 to 101.5. 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, power this confidence.

    Economists estimate that a 1 percent 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.

CUNA’s 2015 credit union forecast calls for 11.2 percent loan growth; 4.8 percent savings growth; 5.9 percent asset growth; and an “astounding” 3.2 percent membership growth.

“The economy is in a better place this year than last year,” Schenk said, “and it will be in a better place next year.”