Gains Ahead for Core CU Businesses – Cars & Mortgages

Despite the Fed’s continued rate hikes, the U.S. economy chugged forward again in the second quarter and trade groups predicted better conditions ahead for credit unions’ core businesses: Mortgages and car loans.

The U.S Bureau of Economic Analysis on Thursday released its first estimate of second-quarter gross domestic product (GDP). It showed GDP rose at an annualized, seasonally adjusted rate of 2.4% from the first quarter to the second quarter, following a 2% increase in the first quarter.

NAFCU Economist Noah Yosif said the report shows the economy is better able to absorb the Fed’s 25 basis-point rate hike announced Wednesday, but the Fed’s achieving a soft landing will depend on how it times the end of its rate hikes.

“A moderate pace of growth affirms the economy had plenty of fuel in the tank to weather a historic combination of rising interest rates and inflation,” Yosif said.

“The dual-resilience in consumer spending, underpinned by a robust labor market, and business investment, supported by sustained economic activity, enabled the economy to avoid a recession at a time of heightened vulnerability to realizing one,” Yosif said.

The Mortgage Bankers Association’s July 20 forecast showed GDP falling 0.3% in the third quarter and another -0.4% in the fourth quarter before resuming growth.

Mike Fratantoni, the MBA’s chief economist, said the 2.4% GDP gain in the second quarter showed “the economy grew at a solid pace in the second quarter, supported by steady growth in consumer spending – clearly a reflection of the ongoing strength in the job market.”

“However, the sharp drop in exports shows that this growth in the context of a weak global economy is creating a headwind for the economy along with the negative impact from restrictive monetary policy,” Fratantoni said.

Cox Automotive on Wednesday forecast that new cars will sell at a seasonally adjusted annual rate of 15.9 million, up from a SAAR if 13.3 million a year earlier and June’s 15.7 million level.

The Cox Automotive report said new car sales have been showing “surprising strength this year in spite of large interest rate increases, and July is expected to continue that trend.” Some of the gains so far this year and in the second half will come from a resurgence of fleet sales. Retail sales of new cars in the second half are likely to be slowed by high prices and tighter credit, but incentives are likely to increase.

Fed Chair Jerome Powell threatened further rate hikes Wednesday, but Cox Automotive Chief Economist Jonathan Smoke said he doesn’t think further increases will be warranted by economic conditions, including those in the auto industry.

“Because of the impact of higher rates, tighter credit and improving supply, the auto market is indeed returning to a balance between supply and demand. And lower vehicle prices will help overall inflation continue to come down,” Smoke said.

Smoke said higher sticker prices combined with higher interest rates have priced out about 5% to 10% of potential car buyers.

“We have seen the most impact on the used auto, where sales have declined for more than a year,” Smoke said. “However, this spring likely represented the bottom for the weak used-vehicle sales trends, as affordability should improve from here, enabling incremental demand to grow.”

In the housing market, the National Association of Realtors on Thursday reported that pending sales of existing homes rose in June – the first monthly increase in four months.

“The recovery has not taken place, but the housing recession is over,” NAR Chief Economist Lawrence Yun said. “The presence of multiple offers implies that housing demand is not being satisfied due to lack of supply. Homebuilders are ramping up production and hiring workers.”

NAR’s forecast released Thursday showed existing home sales falling 9% in the third quarter, but starting a recovery in the fourth  quarter with a 10% gain. Meanwhile, new home sales, which already have been rising, are expected to grow another 28% in the second half.