MADISON, Wis. - The American consumer is buying again and credit unions are taking advantage by booking solid loan growth, according to the November Trends Report by CUNA Mutual Group.

Overall, CU loan portfolios increased 0.8% in September, 7.9% year to date and 10.1% year over year, the report said.

Auto lending continued to trend up in September, with new auto loan balances rising 1.9%, more than double the 0.9% pace reported in September 2013. Fixed-rate first mortgage loan balances rose 2% in September, the fastest growing loan category for the month. First mortgages were up 6.7% year-over-year.

The U.S. economy added 256,000 jobs in September and the unemployment rate fell to 5.9%. Steven Rick, chief economist for CUNA Mutual Group, said these numbers are an indication the labor market is tightening and wage growth should begin to accelerate in the first half of 2015.

"We expect job growth to average more than 250,000 in 2015 and be widespread across industries, regions, firm size and pay scales," Rick wrote, adding, "This will bode well for consumer confidence and, in-turn, increase their desire to borrow and spend."

The economy grew by 3.5% in the third quarter, better than many analysts had expected. Rick said the main reason for the improvement was the reduction in government drag. Final sales, which exclude the support to GDP from inventories, were even stronger, rising 4.2%.

Rick and the economists at CUNA Mutual expect the economy will grow more than 3% in 2015, above its 2.5% long-run average rate.

Other report highlights include:

  • At the end of September, CUNA's monthly estimates reported 6,590 CUs in operation, down 63 CUs from one month earlier. During the last year the number of credit unions declined by 274, similar to the 275 lost for all of 2013.
  • Credit union savings and assets both fell by approximately 0.7% in September, historically a weak month for deposit growth. Savings balances are up only 3.7% during the last 12 months due to members desire to spend rather than save. Credit union total assets now stand at $1.130 trillion, a 4.8% increase over September 2013.
  • Credit union memberships rose 470,000 in September to reach 101.4 million, a 0.5% increase from August. Year-over-year, memberships are up 3.4%, the fastest growth rate since July 2003. Credit unions with assets greater than $1 billion reported membership growth of 6.3%, while credit unions with assets less than $20 million reported memberships declining by 1.6%.
  • Credit union financial performance improved in the third quarter. The movement's return-on-asset ratio rose to 0.89%, up six basis points from the second quarter and up from the 0.69% in the third quarter of 2013, according to recently released NCUA call report data. Credit union total capital reached $122 billion in September, pushing the capital-to-asset ratio to 10.8%, the highest in six years.

Every Loan Category Up

Credit union loan balances rose 0.8% in September, slightly better than the 0.7% pace reported in September 2013. In the last year, credit union loan balances rose 10.1%, the fastest pace since March 2006.

The increase in borrowing pushed the loan-to-asset ratio to 63.1%, up from 60% one year earlier. The report noted for the first time since the onset of the great recession, every major loan category tracked by CUNA's monthly survey posted positive year-over-year growth in September.

According to CUNA Mutual's Rick, there were a number of factors driving the surge in credit union lending: rising household expectations for future income growth, improved consumer balance sheets, lower debt burdens, rising consumer confidence, rising job creation, faster wage growth, and credit unions picking up a larger share of the consumer credit market.

Credit unions' consumer installment credit balances were unchanged in September due to what Rick termed a "surprisingly weak" retail sales number. Total retail sales fell 0.3%, with falling gasoline prices a major contributing factor. However, less spending on gasoline means more household disposable income becomes available for spending on other goods and services. The drop in gas prices also allowed some credit union members to pay down their credit card balances.

The net effect, Rick wrote, was a zero growth rate for credit union credit card loan balances in September. During the last 12 months retail sales are up 4.3% and credit union consumer installment credit is up a very strong 11.9%.

"As the job market strengthens and consumer confidence increases in 2015, we expect members' desire for revolving credit to increase over 10% next year," Rick predicted.

Vehicle sales remained strong in September with 16.4 million new vehicles (cars and light trucks) sold in the U.S. at a seasonally adjusted annual rate. This is a 6% increase from one year earlier. CUNA Mutual expects 16.5 million vehicle sales in 2014, which it said is a pace consistent with a steadily improving economy and reflects healthy conditions for the auto industry.

"Vehicle sales will maintain their momentum in 2015 due to the steadily improving job market, rising average hourly earnings, higher levels of consumer confidence, falling gasoline prices, and significant demand to replace aging vehicles," Rick wrote. "Therefore we expect auto sales to approach 17 million units in 2015, above the long-run equilibrium of 15.5 million, until most of the pent-up demand is satiated."

 

Housing Affected By Weak Recovery

Fixed-rate first mortgage loan balances rose 2% in September, the fastest growing loan category for the month, and were up 6.7% year-over-year. Adjustable-rate mortgages rose a more modest 0.9% in September, but are up a "remarkable" 16.3% during the last 12 months. Rising home prices and consumer confidence pushed home equity loan balances up 0.8% in September, and 6.2% year-over-year.

Real estate loans now make up 51.5% of the total credit union loan portfolio, the lowest percentage since December 2007, the month the National Bureau of Economic Research cites as the beginning of the Great Recession. The high water mark for real estate loans was set in March 2011, when the loan percentage reached 55.3%. Charge offs, deleveraging and faster growth in auto, credit card, and business loans explains the reduction in real estate loans as a share of total loans, Rick explained.

The recovery in the housing market has been "weaker than many analysts had expected," Rick said, noting the pace of construction of new single family homes is roughly half its long-term average.

In September, the government reported a 646,000 annualized rate of single family home starts. While this number is 11.4% above the pace reported a year earlier it is significantly below the 1.2 million average pace set during the period of 1995-2001, before the onset of the housing and debt boom and bust.

"A couple factors explain the weak recovery in residential construction," Rick wrote. First, young households are delaying the plunge into home ownership. Many are exercising enhanced caution after living through the massive house price correction experienced in the U.S. from 2006 through 2011, and therefore, prefer to rent than own. Others are weighed down by excessive debt, or are facing the consequences of a weak labor market on new job entrants.

The second factor was a rather large amount of shadow housing inventory. Foreclosed homes and short sales were a good substitute for a new home purchase for many buyers in the last few years. Also, rising home prices today are encouraging homeowners who were previously "underwater," meaning their home was worth less than their mortgage balance, to list their homes for sale.

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