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Latest lending trends could spell upcoming economic slide: Report

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One credit union economist is forecasting “below trend” CU loan growth “for the next few years” after loan balances for June grew at a slower pace than one year prior and below the trending pace set during the last five years.

Steven Rick, chief economist for the Madison, Wis.-based CUNA Mutual Group, noted in the firm’s latest Credit Union Trends Report that credit union lending went up 0.7% in June, slower than the 1.1% year-over-year increase recorded in June 2018. Part of this slowdown was attributed to weaker growth in new auto loans (-0.1% vs 1.5%) and fixed-rate first mortgages (0.9% vs 1.7%).

The slower pace in growth is significant, Rick continued, because June tends to have the best loan growth of the year. He said seasonal factors add 0.39 percentage points to underlying trend growth.

In June 2019, credit union loan balances increased at a 5.2% seasonally adjusted, annualized rate, which Rick pointed out was “significantly below” growth seen during the half decade.

“This is indicative that both the credit cycle and the U.S. business cycle are moving into their last stage before the next economic slowdown,” Rick wrote in the report, adding his forecast for loan growth to slow further in the years to come was due to “little pent up demand remaining” for durable goods by the American consumer. He noted “durable goods” are defined as items lasting 3 years or longer, including automobiles, appliances and furniture.

Another issue, spotlighted earlier this month by Bill Hampel, former chief economist at the Credit Union National Association, is many credit unions have “constrained” liquidity as they are seeing the highest loan-to-share ratios since the 1970s.

“We may be seeing some credit unions pull back on the availability of credit and implementing tighter lending standards,” Rick predicted.

The gloomy outlook of the August Trends Report comes just one month after Rick said he expected credit union loan balance growth to remain “close to its long-term average of 7.2%” in the July Trends Report.

At the end of June, CUNA estimated, there were 5,529 credit unions in operation, down 21 from one month earlier. Year over year, the number of credit unions declined by 179, which was less than the 234 lost in the 12 months ending in June 2017.

Total credit union assets increased 0.2% in June and 4.3% year to date. Rick said CU assets rose 6.1% over the past year due to a 6% increase in deposits, an 11.2% increase in capital and a 1.5% decrease in borrowings.

There was a mix of good and bad news on the membership front: Credit union memberships increased by a “robust” 0.3% in June, but that figure was less than the 0.4% gain reported in June 2018. CU memberships were up 3.5% over one year earlier thanks to “rapid” job creation and “strong” demand for credit card and mortgage loans, CUNA Mutual said.

Delinquency rates on credit union loans were just 0.51% in June, an improvement from 0.67% one year earlier due to delinquent loan balances falling 18.5% over the last year.

“The strong economy has pushed the labor market beyond full employment, allowing members to stay current on their debt,” Rick assessed.

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