By Ray Birch
PLANO, Texas—Robust economic recovery may come sooner than most CUs expect, according to a forecast from Brian Turner, who believes auto lending will put the horsepower in the comeback.
Turner also offered a forecast for what with rates at credit unions as the economy gets back on its feet, while sharing what would be bad news for smaller credit unions.
“We’ve already seen two consecutive quarters of recovery (Q3,2020 +33.4%, Q4, 2020 +4.3%) with expectations that growth will continue through the remainder of 2021-22,” said Brian Turner, president and chief economist with Meridian Economics. “I expect economic growth to average between 3.1% to 3.9% this year, depending on continued government intervention and, more importantly, the willingness of members’ to open their wallets and spend money—especially on vehicles, homes and home improvement, all things for which credit unions extend financing.”
Passing on Costs
Turner pointed out the U.S. government has provided nearly $6 trillion in relief since the pandemic started in March 2020, while the Fed has continued to hold its benchmark overnight interest rate at near zero while pumping money into the economy through monthly bond purchases.
“I agree that while we expect a surge in demand and bottlenecks in the supply chain as the economy reopens, it seems unlikely that it might change the underlying inflation psychology that has taken deep roots over the course of many years,” he said. “Unlike what Fed Chairman (Jerome) Powell expresses, I believe that businesses have the capacity to pass on the higher production costs to consumers.”
The implication, said Turner, is manufacturers potentially have the sort of pricing power not seen in years.
“With greater scope to pass these price rises on to customers, the obvious implication is that risks are increasingly moving in the direction of higher CPI readings,” he explained. “The latest report shows wholesale inflation rose 7.2%, year-over-year, in February while current consumer inflation is and will be running between 1.7% to 2.4% during the year.”
Brian Turner
Turner pointed out the country has already seen a sizable uptick in auto sales, as the annualized pace of vehicle sales has increased from 16.7 million units in December to 18.2 million units in March, a level last achieved in October 2018 and more than double the annualized pace of nine million units during the worst period of the pandemic in April 2020.
The Mortgage Market
Turning to the mortgage market, after reaching a recent peak of 7.8 million units in October 2020, home sales have been on a steady monthly decline, reaching 6.9 million annualized units most recently, said Turner.
“The latest Federal Reserve report on consumer credit shows credit union non-revolving credit declined by $2.5 billion from December 2020 to March 2021, but still retained a 6.4% market share,” he said. “According to fourth quarter 2020 industry performance data, the industry’s vehicle loans, once its bread-and-butter product, now account for only 33% of total loans. Eighty percent of the industry’s vehicle loans are retained by its largest peer group, those with $500 million or greater in assets. This accounts for 82% of industry assets but only 13% of total credit unions, whose vehicle loans only account for 31% of their total loans. Vehicle loans retained by the remaining ‘87-percenters’ collectively account for 40% of total loans.”
Turner said this also coincides with mortgage financing, which saw its quarterly outlay in Q4 2020 hitting 3.57 million applications, 62% of which were refinancing and the remaining 38% purchase applications.
“According to Q4, 2020, industry performance, mortgage loans accounted for 52% of credit union industry loans and 315% of the industry’s collective net worth,” said Turner. “Most of the real estate loans are concentrated within the industry’s same largest peer group, where real estate loans account for 53% of loans and 337% of net worth. The remaining 87-percenters collectively retain only 43% of their loans in real estate comprising only 224% of net worth.”
While CUs have seen benchmark Treasury rates increase 18 basis points higher since December, the average five-year vehicle rate has declined 15 basis points to 2.93%, diluting its pricing spread by 33 basis points.
“Since Q4, 2020, average mortgage rates have risen from 2.8% to 3.1% and are expected to increase further to 3.4% by year-end and 3.8% in 2022,” said Turner. “This will slow home sales over the next two years and reduce the ratio of refinancing applications from 68% to 22% of total applications. Since last September, mortgage pricing spreads have been diluted by 92 basis points. So, in both instances, credit union’s relative value of whole loan issuances has declined.”
The Effect of Larger CUs
Turner said one of the reasons that credit union consumer loans and mortgage rates have not risen faster is the influence the larger CUs, $500 million and greater in assets, have on the industry’s overall market dynamics.
“Over the past few decades, growth in this peer group alone has far outpaced market growth across the board as regulators have permitted them to expand well beyond their central markets,” he said. “This has virtually established national credit unions that, in some case, have impacted market pricing and decimated smaller-market credit unions’ ability to attract and retain their share of loans and deposits, mostly A- and B- paper loans.”