As we move closer to 2025, credit unions are facing a mix of challenges and opportunities, as highlighted by Steven Rick, chief economist at TruStage. The economic environment, shaped by high interest rates and liquidity issues, is testing the resilience of credit unions. Understanding recent trends and forecasting future developments in credit union lending is essential for navigating this landscape.
The lending landscape
Credit union lending has seen its ups and downs over the past two decades, closely following broader economic cycles. However, 2024 is proving to be a particularly challenging year, with a lending growth rate of just 3.3% — significantly lower than the long-term average of 7%. This is the slowest growth since the aftermath of the Great Recession, indicating a tough environment for credit unions.
The origin of this slow growth dates back to 2022, when there was a notable rise in credit union lending, particularly in the auto loan sector. With interest rates at historic lows — auto loan rates were as low as 3% — there was a rush to secure loans, effectively “pulling forward” demand that would have otherwise occurred in later years. This has left current demand for loans much lower, contributing to the slow growth seen in 2024.
The impact of federal reserve policies
The Federal Reserve’s monetary policy has played a crucial role in shaping the current lending environment. Over the past few years, the Fed has steadily increased the federal funds rate, which now stands at 5.35%. Higher interest rates typically lead to reduced borrowing as loans become more expensive for consumers. This has directly impacted credit union lending, with fewer people taking out loans for major purchases like cars and homes.
Looking ahead, credit union lending is expected to remain subdued. Growth is forecasted to stay around 3% this year, with a slight improvement to 5% next year. However, these figures still fall short of the long-term average, suggesting that the lending environment will continue to be challenging.
Liquidity constraints
Another significant issue affecting credit unions is liquidity. Many credit unions are experiencing high loan-to-asset ratios, with some nearing record levels. This means that credit unions have less money available to lend, as much of their assets are already tied up in existing loans. Consequently, credit unions are struggling to sustain additional loan growth.
The Federal Reserve is closely watched as it tries to balance controlling inflation with supporting economic growth. After holding the federal funds rate at 5.35% for 13 months, the Fed is expected to start lowering rates soon. The first cut could happen as early as September, with further reductions likely by the end of the year. By December, the rate could drop by as much as 100 basis points. Over the next few years, the Fed aims to bring the rate down to 2.5%, a level that balances economic growth and inflation.
The shrinking money supply
One of the most significant developments in recent months is the shrinking U.S. money supply, a phenomenon not seen since 1948. The money supply includes all currency in circulation, deposits in checking, savings, and money market accounts. A shrinking money supply means fewer deposits are being made, which limits the ability of financial institutions like credit unions to lend.
The Fed’s decision to shrink the money supply is a response to the excessive liquidity injected into the economy during the COVID-19 pandemic. In 2020 and 2021, the money supply grew at an unprecedented rate of 27%, contributing to the inflationary pressures we’re experiencing now. While the Fed’s policy aims to correct this imbalance, it has also created new challenges for credit unions, particularly in terms of liquidity.
Trends in U.S. vehicle sales
Before the pandemic, U.S. new vehicle sales were steady, averaging around 16.5 to 17 million units annually. However, the pandemic caused a significant drop in sales, followed by a sharp rebound to near pre-pandemic levels. Throughout 2021 and 2022, new vehicle sales struggled to reach the 16.5 million mark due to supply chain disruptions, particularly the shortage of semiconductor chips. In 2024, sales are on pace for about 15.8 million units, still below historical demand levels. High interest rates and elevated car prices are key factors keeping sales below expectations.
If the Federal Reserve starts lowering interest rates, new vehicle sales could increase, potentially reaching 16.5 million units by the end of 2024. After a spike in 2022, new car prices have started to decline, down about 1% from the previous year. This price drop, combined with potential interest rate cuts, could help boost new car sales. Meanwhile, used car prices, which saw a dramatic increase of 40-45% during 2021-2022, have dropped by 10.3% over the last 18 months. This decline in prices has led to issues like negative equity for some car owners.
Challenges and opportunities ahead
While the economic environment is challenging, there are some positive signs. After a historic low in 2023, savings growth at credit unions is beginning to rebound. Total savings balances are now growing at a rate of 4%, a positive sign after a year of near-zero growth.
However, much of this growth is driven by higher interest rates offered by credit unions, rather than an influx of new deposits. In essence, credit unions are “buying” deposits by offering attractive rates on savings accounts, CDs, and money market accounts. While this strategy helps boost savings balances, it also highlights the ongoing liquidity challenges facing the industry.
The economic outlook for 2024 is cautiously optimistic, with modest growth of 1.9% to 2% and no recession expected. Decreasing inflation and anticipated interest rate cuts are likely to boost consumer confidence and spending. However, challenges remain, particularly for young and lower-income households who may experience financial stress as wages lag behind inflation.
Despite these challenges, the expected drop in interest rates offers some relief. For credit unions, staying informed and adaptable will be crucial to managing the opportunities and risks that lie ahead.
