Slow Loan Growth 'Indicator of an Impending Economic Slowdown'

Credit union loans grew in June at their slowest seasonally adjusted rate since late 2012, providing another signal of economic trouble ahead, according to a report released by CUNA Mutual this week.

Growth from May 31 to June 30 is usually the fastest of the year. However, loan balances rose only 0.7% in June compared with 1.1% in June 2018. The May-to-December growth translates into an annual, seasonally adjusted rate of 5.2% — about half the rate of a year ago and the lowest since late 2012, according to its monthly Credit Union Trends Report.

“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,” CUNA Mutual chief economist Steve Rick said. “We are forecasting below trend credit union loan growth for the next few years due to little pent up demand remaining for durable goods by the American consumer.”

The chief concern among durable goods are cars, which are the basis of about a third of credit unions’ loan portfolios.

Credit union new-auto loan balances fell at a 1.2% seasonally-adjusted, annualized growth rate in June, the first negative reading since the fall of 2011

“Negative readings are associated with recessions, so this is yet another indicator of an impending economic slowdown,” Rick said.

On a brighter note, used car loans, which account for 61% of credit union car loan balances, rose 0.8%, down only slightly from the 0.9% gain in June 2018.

The other major factor in slow loan growth for the month was fixed-rate first mortgages. Their loan balances grew 0.9% in June, about of the 1.7% gain in June 2018.

The Mortgage Bankers Association in Washington, D.C., reported Wednesday that mortgage applications dropped 0.9% last week from a week earlier on a seasonally adjusted basis. The refinance share of mortgage activity increased from 61.4% of total applications in the week ending Aug. 9 to 62.7% in the week ending Aug. 16 — its highest level since September 2016.

“Lower mortgage rates have yet to lead to a notable rise in homebuyer demand. Purchase applications fell more than 3%, but were still 5% higher than a year ago,” said Joel Kan, MBA’s associate VP of economic and industry forecasting.

The small moves in rates and refinancing might also be signs that lenders are approaching capacity constraints from the refinancing surge, Kan said.

Rick forecast the U.S. economy would rise 2.1% this year and 1.5% in 2020.

“This will slow job creation and lower consumer confidence and, ultimately, credit union loan growth,” Rick said.

CUNA economists have generally struck a more optimistic tone in recent months, and in June they predicted economic growth would fall from 2.1% this year to 1.8% in 2020.

However, CUNA President Jim Nussle said Wednesday that much of fate of the economy is in the hands of consumers, and that is troubling him based on what credit union managers are hearing from their 120 million members.

“We’re hearing that concern from our members,” Nussle said during an interview on CNBC. “They’re worried about their future – whether it’s their job, living paycheck to paycheck, and they’re seeing their costs going up because of the trade war.”

“If they decide to stop spending, that will force us as quickly as anything into a recession.”