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Schenk: expect above-average loan growth
CUNA Chief Economist Mike Schenk is “rather optimistic” about the lending outlook through the second half of 2022.
This rests on the idea that the Federal Reserve has not overreacted with its recent aggressive increase in federal funds interest rates – that it CAN and WILL orchestrate a “soft landing”. That’s a big guess: the central bank’s track record on this front isn’t all that good. However, it is important to note that most of the Fed’s missteps have occurred during mature recoveries.
Historically, when the Fed responded to inflationary pressures at the start of expansions, the economy continued to grow. For example, in 1992, inflation rose from a rate of around 2% year-on-year to 4%. The Fed raised rates by about 330 basis points in 18 months, but the economy continued to grow for four years. This happened against the backdrop of the Clinton administration’s steep tax increases and government spending cuts.
“Today we have a similar situation and I suspect the combination of pent-up demand and a fairly strong labor market should help keep loan growth at a slightly above long-term average pace.” , Schenk said.
CUNA’s most recent quarterly forecast calls for loan growth of 8% in 2022 and 7% in 2023, compared to 7.5% in 2021. Given the aggressive Fed decision in June, these increases could be slightly lower. reduced in the next forecast, but Schenk expects reductions. in the outlook of being modest.
Part of Schenk’s optimism is due to the expectation that the unemployment rate, currently 3.6%, will remain low through 2023. Wages and salaries are also rising relatively rapidly.
“The good news is not only that a relatively healthy level of growth will continue, but that we expect these increases in loan portfolios to be broader going forward,” he said.
Growth in loans to credit unions will range from first mortgages, business loans and used auto loans to home loans and new auto loans, as well as credit card and personal loans not guaranteed, Schenk said.
While supply chain issues have led to substantial price increases, CUNA forecasts suggest continued demand for automobiles and homes. These increases will likely be lower than in previous economic recoveries, but still relatively decent, overall. For example, new vehicle loans declined in 2021, but Schenk expects a 5% to 5.5% increase in 2022.
First mortgages are up about 9.5% in 2021. But with far fewer mortgage refinances in 2022, first mortgages will be up about 5%. “There was a huge amount of mortgage refinancing activity that propelled loan growth in 2021,” Schenk says.
“While demand for loans should be strong, it is important to note that the growth of unsecured loans is accelerating and this tends to be correlated with situations where vulnerable people are approaching potential trouble,” he continues. . not seeing large increases in delinquencies or net charges, but we are monitoring this situation closely. »
He thinks the US economy will likely avoid a recession.
“Our forecast for overall economic growth has been significantly lowered from our expectations at the start of the year. This is both because we did not anticipate the war in Ukraine and because the Fed is obviously accelerating interest rate hikes that we had anticipated. In my view, we are now on a knife edge, with the probability of a recession approaching 50-50,” Schenk said.
“For now, our baseline scenario indicates that labor markets will continue to reflect strong performance overall. If that happens, it should keep the economy on track and will be particularly helpful for co-op operations. in general and loans from credit unions in particular.
» Listen to an episode of the CUNA News podcast with Mike Schenk