CUNA Mutual Group: Five economic indicators every credit union leader should track
Tuesday, February 19, 2019
Posted by: CUNA Mutual Group
This year is off to a strong start. Despite the market roller coaster that ended 2018, we continue to see strong jobs numbers, low unemployment rates, and high consumer confidence. As we monitor how our economy performs in 2019 and into 2020, it is important to remain watchful on a few indicators that provide insight for our industry. Here are five key economic indicators that I recommend to watch in 2019.
1. Unemployment Rate
Not a surprise that the unemployment rate is a good gauge for economic developments nationally and locally. A lower unemployment rate correlates with faster credit union loan growth and lower loan delinquency rates. There is a clear cyclical pattern in unemployment. As demand increases, companies take on more workers and unemployment decreases. When there is no more labor available (when the unemployment rate falls below its natural long run rate), higher consumer spending bubbles over into inflation and therefore higher interest rates. Credit unions can find the unemployment rate in their state and city by going to the U.S. Bureau of Labor Statistics website at ww.bls.gov.
2. Vehicle Sales
Vehicle sales (cars and light trucks) are another good leading indicator of economic activity, manufacturing production and demand for durable goods which are vulnerable to the economic cycle. Credit union new auto lending volumes correlate to vehicle sales numbers. During the past five years, vehicle sales have been above the long run inherent demand level of 16.5 million units. Not surprisingly, credit union new auto balances have grown by more than 10% annually for each of the past five years. With vehicle sales numbers expected to revert to the long run average of 16.5 million units during the next two years, we expect credit union new auto lending growth numbers to fall below 8% annually.1
3. Consumer Confidence
Consumer confidence measures the degree of optimism that consumers feel about their personal financial condition and the overall state of the economy. When consumers feel optimistic about job security and the future state of the economy, they are more likely to tap into the stream of future paychecks by taking out a loan. The recent surge in consumer confidence over the past few years has been associated with double digit loan growth at credit unions. Recent turmoil on Wall Street and policy uncertainty coming out of Washington D.C. may weigh on consumer confidence going forward into 2019. Therefore, we are forecasting a slowdown in credit union lending, from 10% in 2018 to 8% in 2019.1
4. Stock Prices
Stock prices have traditionally been viewed as a forward-looking indicator of the state of the economy. Large decreases in stock prices may predict recessions whereas large increases in stock prices may point to future economic growth. Consumers tend to borrow and spend more during periods of rising stock prices. Some consumers will sell appreciated stock and use the proceeds as down payments for new vehicle loans. Others are content to reduce their monthly savings and use part of their income to cover monthly new car loan payments, for example. Recent volatility and declines in stock prices may reduce the growth rate in credit union loan balances outstanding in 2019. It is important to watch as sentiment dips, it may be an indication for a pullback in consumers’ willingness to borrow and spend.
5. Existing Home Sales and Inventory of Homes for Sale
Existing home sales are considered a leading economic indicator and tallies the number of sales of existing homes that closed along with the median sales price. Existing home sales are a good gauge of consumer aggregate demand and their willingness to borrow. During the last 5 years, existing home sales have exceeded the 5 million mark considered by economists to be associated with a healthy housing market. 1 Credit union mortgage lending growth rate has therefore exceeded the long run average during the same time period. Rising mortgage interest rates and rising economic and policy uncertainty could reduce existing home sales and credit union mortgage lending in 2019. Therefore, it is a good idea to reevaluate your mortgage staffing needs and projections for mortgage originations.
The past four years have provided an economic backdrop that has led to a relatively prosperous and calm business environment for credit unions to operate. Those days may be coming to an end as rising interest rates, uncertainty over macroeconomic policy, and slowing global economic growth may lead to a possible recession in 2020. It will become imperative for credit unions to watch these economic turning points and how they will impact long term strategic planning.
Steve Rick is chief economist for CUNA Mutual Group, the leading provider of insurance and financial services to credit unions and their members. For the latest credit union trends monthly report, please visit here for more information.
CUNA Mutual Group is the marketing name for CUNA Mutual Holding Company, a mutual insurance holding company, its subsidiaries and affiliates. Corporate headquarters are located in Madison, Wisconsin.
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1 - CUNA Mutual Group Credit Union Trends Report – January 2019 (November 2018 data) – page 1 – 3.