Inside the economy with Steven Rick: Trends that shape your lending

Good morning or good afternoon wherever you might be today. My name is David Adams, SVP of of well, it says embedded finance, sales success. I know that title doesn't say that, but I've got a new role here at Origence working with our embedded finance opportunities to to support the industry. I always love that old picture of me. Reminds me I used to be a young man in my twenty six years here at Origence. I'd like to thank you for joining us. So today, our webinar is called inside the economy with Steve Rick, trends that shape your lending. Now it's my pleasure to introduce today's speaker. Steve Rick, director and chief economist from Tuesdays joined us as as our presenter. Steve's primary responsibilities include conducting strategic research, analysis, and forecasting of the financial services industry with a special emphasis on the consumer and crediting markets. Rick's forecast serve as a starting point for the strategic planning process and help create a clear understanding of the underlying trends and links between the general economy, the financial services industry, and the company's policy owners. Steve publishes the credit union trends report, a monthly pulse check on the economic state of the credit union movement. He has authored a textbook on asset liability management for credit executives. Before joining the company, Rick was the senior economist for CUDL affiliates, economics and statistics department for twenty two years. And for those of us that went to CUDL school in Madison, I think you remember Steve, running our simulator in in class. He's become a real fan favorite here at Origence, and we get great remarks every time he speaks to our our audience. Before we get to Steve, I'm gonna I'm gonna go over a few slides of my own to show you what's going on here at Origence. And for those that may be new, I always like to present this slide that maybe you're you're new to the credit industry and don't know who the the Origence, the credit union service organization or CUSO is, but that is our parent brand. And, obviously, CUDL is our indirect automotive brand on the left doing a live and well. We run a very successful loan origination and point of sale platforms called arc OS and arc DX. On the very far right is Orchest Lending Services that can do it outsourced or a business process outsourcing for just about all aspects of your of your consumer lending programs. Then a subsidiary of that is FI Connect, which is a wholly owned finance company that we can actually help credit unions create new lending opportunities and to serve different markets for the credit industry itself. You know, if we're looking at CUDL, again, one of our our our biggest businesses, if you I'm a point out a couple of things. If you aggregate all the credit unions under the CUDL brand, we are the number one auto lender in the United States. We are a force to be reckoned with that power of aggregation, that hunt as a pack mentality. You are a force to be reckoned with. I wanna congratulate you and the audience for having successful programs and making the CUDL brand and making your brand what it is and making it, as we compete against the banks. Couple of things I wanna point out on here. Please watch, like, watch out for Wells Fargo in your local market. They've gone from ninth to third here this year, and they are are with almost seventy five percent growth, and they're definitely something to be watched as they're they're buying for your members' wallet share. The other thing I wanna point out that actually is is a surprise. If you look down towards the number nine position, you have Carvana, and that surprised us. They've actually they have their own captive finance company that serves their marketplace, and they have now creeped into the top ten. So something that that got our attention when we're putting together this slide. We have a lot of data that goes through our pipes, and I want us wanna share our direct and indirect, you know, volume that's going through our different channels. And this direct loans, this is all consumer lending except for indirect lending. So it's got, you know, direct auto credit card. There's probably a few HELOCs that that run-in here as well. But if you look at the red line, that's this year twenty twenty six. And on the on the very on the x axis, you have the number of weeks. So we're coming up on the twentieth week here. We're almost to the midpoint of the year. You know, consumer lending, at least on the direct side, is alive and well, and it's outpacing the last two years. Now on the indirect side, it's kinda a little hard to see, but, you know, the the blue line that is twenty twenty five last year and, again, a red line for twenty twenty six, it started outpacing here. And if you remember last year about this time, we had a little bit of anomaly in the market. We had that pull through demand with because of the tariff impact, and consumers are out there buying vehicles. So, yes, you showed last year at this time, were were it's kinda outpacing what we're doing this year. There's kinda artificially inflated last year. But, again, on a aggregate, we're starting to see twenty twenty six perform pretty well. The last two slides of what's been I just wanna we believe that Origence has been a CUSO giving back to our industry, and we really support the credit unions for kids at various events throughout the out the country, including our very own wine auction event in Southern California every year. And last but not least, just we do a support. You know, we really believe in this industry that we we work in. And, again, just the various, some of these these are just actually samples of organizations that we support or members of, across our credit union community. That being said, that's end of my remarks. I'm gonna turn it over to Steve, who's our guest of honor. Steve, take it away, I'll be back to have some questions from the audience. Alright. Well, thank you, Dave. Yeah. Let's jump right in. We have about forty five minutes here to talk a lot about the economy and what impact it's have on credit union lending for this year and maybe looking into next year. Basically, as we know, the Federal Reserve met last week, and let me just put up a chart looking at the Fed funds interest rate. Basically, the most important interest rate in the world, this is the interest rate the Federal Reserve controls. And you can see where we're at right now. It's about three point six. Basically, the Federal Reserve kept it at three point six last week. Notice it's slightly above my goal line. What's my goal line? We call that the neutral interest rate. We can get three percent by adding two percent inflation, which is the Fed's long run target, plus a one percent real equilibrium rate that economists kinda believe is at at right now. So notice we're slightly above the gold line, meaning the Fed's stance of monetary policy is slightly restrictive. Whenever you're above the gold line, it means the Federal Reserve's kinda pressing on the brake, if you will, if you use a car analogy, that the Fed's trying to slow the car down by pressing on the brake, have interest rates above what we would typically see to maybe keep lending a little bit lower than we would typically see in order to bring inflation down. Using my car analogy, think about the cars was driving, you know, eighty, ninety miles an hour a little bit too fast. Inflation was too high. So the Fed raised interest rates to slow things down. You know, the big question is what is the Federal Reserve gonna do with this blue line going forward? Let me just kinda put up a couple slides here. Let me get to the last one. You see those two black lines at the end called one and two? There's a big discussion right now what the Fed should do with interest rates, which, of course, affects credit union lending. Path one there, notice it could be lower interest rates. Maybe the Fed could drop interest rates that last roughly fifty basis points because they're more focused on the labor market. You've probably seen job growth right now is extremely slow. And, of course, if people are getting jobs, that means they're typically taking out loans. But if we're seeing fewer people getting jobs, it could weigh on job growth and and a loan growth. Or path number two, the Fed just may hold rates where they're at for the rest of this year. Right now, a lot of people are saying, you know what, we could be on path two. That black dotted line where the Fed's more focused on inflation and just holding rates where they are for the remainder of this year. And right now, most economists say we could be on path two going forward. Moving on, how is this impacting all lending? You see this chart here is called total consumer credit. So we're talking about here auto loans, credit card loans, personal loans. This is by all lenders, not just credit unions, but banks and finance companies are added in. I noticed year over year, it's rising about three point two percent. Notice that's below my gold line on this chart, which is the long run average of five percent. So because the Federal Reserve is having interest rates slightly above normal, slightly in a restrictive territory, it is keeping lending growth when it comes to consumer lending a little bit lower than we would typically see at about three percent. Also, let's just take a look at credit union data. This is pure credit union data through the end of last year. Credit union loan growth, basically, we should be around seven percent. You know, in the long run, credit union loans typically grow seven percent a year. But you can see there are is what we call a credit cycle, the booms and busts, if you will, I've said, like, a business cycle, but this is the consumer cycle. Right now, through the end of last year, was only growing about four point one percent, a little bit weak. And you can say, you know, why is credit union lending on the weak side? Well, let me pop up a little box here with all the reasons why. Number one, those high interest rates from the Federal Reserve being a little restrictive, kinda keeping rates high so people don't wanna borrow as much credit. Number two, high amortization of existing debt. You notice all those loans being made back in twenty twenty two. Notice the explosion of lending on my chart here. Nineteen point one percent. Basically, when interest rates were at record low levels, we saw record low loan growth take place. So if you ever wanted a chart to say, hey, you know, does monetary policy really impact people's behavior? Yeah. You push interest rates down to record lows and lending growth explodes to nineteen point one. But a lot of those loans we made a few years ago are being paid back now just to the basic amortization, you know. If you make a four or five year auto loan, by year four and five, you're paying back a lot of the principal of that loan. And so we're seeing that kinda weighing down on our overall loan growth. Number three, low consumer confidence. We'll take a look at a couple charts here in a minute showing how low consumer confidence is, almost in recessionary levels. And then number four, high uncertainty in these fears of recession, keeping people on the sidelines not taking out loans. What about banks? Are we seeing a similar picture of the banking data? Yeah. Banks have a similar boom and bust. You know, in twenty twenty two, you see on my chart, you know, banks are growing about twelve percent loan growth, and then it tanked in twenty four as a lot of those loans are being paid back. But you can see where banks are today. This is dated through April. So year over year growth through April, they're up about seven point two percent. Notice they are above their blue line on my chart, which is around five point seven long run growth. So banks are doing quite well. A lot of banks are doing a lot of commercial lending, you know, more so than credit unions, and commercial lending has picked up. Think about the AI market, artificial intelligence, lot of lending going on with business investment spending and things like that. Alright. Let's move on to what we think about what's gonna happen with the economy. You know, if the economy stays out of recession, well, we should see decent lending growth this year. Take a look at the last bar on this chart. This is economic growth rate. We're forecasting about one point nine percent. Now is that good or is that bad? Well, where's my gold line? The gold line is kind of the long run natural growth rate for the US economy. Basically, that's two percent. So we're forecasting one nine, that's pretty close to being two percent. But you may ask, you know, how does the economy just grow two percent every year? Just naturally or organically? Notice I'm gonna add a little circle on my chart there called labor force. You know, our population typically grows about, you know, one percent a year. So think about putting one percent more people into a factory, they should be able to produce one percent more output. Now to that, you add what's going on with the existing workers in the factory. Notice I added a blue circle right underneath that gold line called productivity. Workers normally get about, hey, you know, about one percent more productive each year. That's kind of the long run average over the last ten years. So you add one percent labor force growth to one percent productivity growth. Any economist do this sophisticated math, we get two percent. Well, what's happened to the labor force growth circle? Well, that's really collapsed because of new immigration policies in this country. We've shut down the southern border. We've deported about two million people. So the labor force is not really growing much at all. So think about that gold labor force circle as being squeezed out of out of. So basically, we need to have that productivity bubble expand. So let me add in for today over on the far right, notice I've added in a productivity bubble that's a lot bigger than we typically see. Now is this happening? Our existing workers say at a credit union, think of maybe a loan officer. You know, if a loan officer could originate, you know, a hundred loans per week last year, now they're doing a hundred and two loans this week. Well, is it because of some productivity enhancing, new technology, something like that? Well, let's take a look at some productivity numbers. Are we seeing a productivity surge in this country? Well, my next slide here let me click on the advance here. Alright. Take a look at this chart. This is pretty dramatic. You know, I used to teach economics at the University of Wisconsin for about twenty six years, and I always stole and I always told my principles of macroeconomics class that the most important thing for any economy is its productivity growth. Are we seeing, you know, two, three percent productivity growth? Well, take a look at those last bars on this chart, the last three years. The numbers just came out this morning. For the first quarter twenty twenty six, the average worker is two point nine percent more productive in the first quarter of this year than they were in the first quarter of last year. So this is year over year productivity growth. That is really good. Notice it's above my two percent line there. So we've seen three years of almost all these bars being above two percent. This kinda compares to twenty eleven to twenty nineteen. Notice I'm a little green arrow I've added to the chart. During those nine years of twenty eleven to twenty nineteen, we only averaged about, you know, one percent, one point one percent. What are we doing in the last three years? Well, notice I've added a new green line on the far right. If you average up all those quarterly bars, those are quarterly numbers, from twenty twenty three to twenty twenty five, we averaged two point six percent. Now why? What's causing this? Well, notice I have a little green text box that is saying Chad GPT, little AI there, was released in November of twenty twenty two. So, basically, at the end of twenty twenty two, Chad GPT released, and, basically, a quarter or two later, boom, we saw a boom in productivity. Now once again, we gotta be careful looking at correlation does not imply causation. You know, does the release of ChadGDP cause the productivity growth? But it is good to see that it has bounced up significant. So is this saying AI, artificial intelligence, influenced increase in productivity at, say, firms throughout this country, which is really good news. But once again, we're gonna need a little bit more time, a little bit more data to really say this is AI productivity boom. Alright. What could actually cause a recession? Like I said, if we have a recession this year, expect loan growth to slow significantly. So what could cause a recession? What are some of the risks? Well, one, a worsening trade war. You know, if Trump keeps putting on tariffs, we may see China, Canada, the European Union retaliate, get a little trade war going. Number two, the federals are too slow in lowering interest rates. That's kinda like driving your car while riding the brakes. You could stall out the car or you could stall out the economy. Number three on our list, decrease in stock in home prices, creating what we call a negative wealth effect. You know, if you and me see our four zero one k's turn into two zero one k's, well, we're we're gonna have a net negative wealth effect. We stop spending as much. Remember that happened back in the year two thousand and one during the dot com bust and also home prices. Let's take a quick look at what's going on home prices right now. Here's a chart looking at year over year increase in the price of homes. If you look on the far right, there's a little blue box saying that through quarter four of last year, home prices rose one point nine percent. Alright. Good. It's in positive territory, but it's a little bit below the gold line. Normally, see home prices rise four point one percent. It's a little bit below the normal, but it's coming off a few years there of really rapid increase in home prices, which have caused affordability problems with respect to homes in this country. You know, a lot of younger people can't afford to buy a home. That's why the average age of a new home buyer is around forty years old today because of the huge increase in prices. But right now, we're not seeing a negative wealth effect in homes. Home price is still going up. That's good. Hey. How about stocks then? Take a look at this chart. This has to be five hundred stock index, you know, the five hundred biggest companies. Do we have a bubble here? And if you have a bubble, it could pop creating a negative wealth. We take a look at this. I just updated this chart today. The S and P five hundred is at seven thousand three hundred and eighty two. That's incredibly high. Looks a little bubblish, but, you know, we can't really compare today's stock prices with what it were say, you know, twenty years ago because of inflation. I haven't adjusted for inflation and prices always go up. So if I use the green line on my chart, let me pop pop up the green line. This is the real S and P five hundred index or inflation adjusted. Well, if looking even after inflation adjusted, look how high the green line is today come compared to what it was, say, even just ten years ago back, you know, back in twenty fifteen. This green line has also just exploded. So in real terms, meaning, if I sold some stock today, how much stuff could I buy? It has just exploded recently. Let me just kinda put in, you know, during those twenty years between nineteen ninety five and twenty fifteen, notice that goal line of ad is kind of the average of what the green real S and P five hundred was. And once again, thing of the green is how much stuff I can buy. What's the quantity? How much milk, bread, and eggs I can actually buy? And, also, the green line just kinda cycles around the gold line. But then something happened ten years ago. Notice ten years ago, I've added in a pink line that says during these last ten years, we've seen this S and P five hundred go up two hundred and eighty four percent. Meaning, I can buy two hundred and eighty four percent more stuff than I could just ten years ago if I sold, say, some stocks here. It has been an incredible rise, which kinda brings up the topic a lot of people are talking about, the k shaped economy. You know, most stocks are held by the top ten percent of this country. Basically, ninety percent of all stocks are held by the top ten percent. So we have the k shape, think of the letter k here, the upper arm and the bottom arm there. The upper arm is those people who own stocks. They're doing quite well. The bottom part of the k is the rest of us, you know, the the ninety percent and below who are, you know, medium, low income people who are not seeing the same benefit of the of this rise in stock prices. This is brought up what's called the new fifty ten rule. What's the fifty ten rule? The fifty percent of all consumption spending is done by the top ten income category. So if you make over twenty fifty thousand dollars a year, congratulations, you're in the top ten percent, and you're doing fifty percent of all consumption spending. We're kinda another topic that comes up. People are asking, is this nineteen twenty nine then all over again? You know, here we are in nineteen or twenty twenty six, back a hundred years ago, roughly nineteen twenty nine, we saw a similar rise in stock prices. Stock prices crashed in nineteen twenty nine, and then we had the great depression. So people are wondering, hey. Do we have some overvaluation going on? Well, notice I've added now a purple line. What's the purple line? That's the line we need to determine, are we in a bubble? Our stock price is too high. Notice the purple line, you can look at the legend is the price earnings ratio. The PE ratio. Basically, what does that tell us in English? Well, what's the price you have to pay to buy a stock to have a claim on one dollar of its earnings? That's the PE ratio. If you look at the long run average, let me put in a gold line across there. In the long run, we normally have a ratio of twenty seven to one. You pay twenty seven dollars to have a claim on one dollar of a company's earnings. Notice the highest it ever got was back in the year two thousand. I put a little purple box up there. Forty four dollars is what we were paying. So notice how the forty four box is way above the gold line there. And if you believe in the phrase reversion to the mean, you believe that in the long run that purple line will come back down to the gold line, which it did basically in the year twenty two thousand one, two thousand two. What's happened recently? Well, a couple years ago, we hit thirty eight. If you move to the year twenty twenty one, we hit thirty eight. Where is it today? Well, let me put up a number today. We're at forty two. This is the second highest ever. So if you're saying, you know, do we have a bubble? Yeah. It looks a little bubbly here. That forty two number is significantly above the gold line of twenty seven. And so, basically, we would like to see in the long run, stock prices come back down to its longer on average. There's two ways to do that, of course. You have a ratio, and what's that old joke? There's a fine line that separates numerators from denominators. Well, we have a numerator and denominator. We can bring this purple line down, this ratio, by either decreasing the numerator, which are prices, turn our four zero one k's into two zero one k's. Well, none of us want that. Nobody wants to see their stock prices fall. So the second option is increase the denominator of this ratio, the earnings. Let's have that go up. What are we all hoping on? Well, no. Let me bring up a little equation here. You can see my gold causation equation there. We asked the question, will AI lead to a boost in productivity? Remember we saw that chart earlier? You know, how productivity in the last three years been averaging two point six percent, which is incredible compared to the teen years. Will that reduce expenses, say, at credit unions and manufacturers and construction companies, leading to an increase in earnings? There it is, the denominator, which will bring down our PE ratio without having to have stock prices crash. This is what everybody on Wall Street is hoping that AI will do for our economy. Alright. Moving on to our list here of what else could go wrong leading to a recession this year and slow credit union loan growth. We still have two wars, the Russia Ukraine war, of course, and the Iran war. Whenever you have wars, that could lead to some instability. Number five, rising energy prices. Well, this is a big topic right now. I just need some charts on where energy prices are. Are they, like, outrageously high? Well, take a look at this chart. Here's the West Texas intermediate price of a barrel of oil. Oil prices were when I updated this chart a cup or two ago, the price of barrel of oil is about one zero nine seventy eight. It's actually fallen below a hundred dollars today. But you can see we have seen that spike in that purplish area on this chart to about a hundred and ten. Like I said, it's down below a hundred today. But, basically, you know, there is your Iran Iran war. I noticed in twenty twenty two, if you look look over to the left, that purple was also at about a hundred and ten. That's when Russia invaded Ukraine. So whenever you get this war, you have these spikes in oil prices. But if you actually go back even farther to the teens, look around twenty ten to twenty fifteen, look at their blue line. The blue line is a better line to look at because it's the real price of oil, meaning I've adjusted for inflation. And when you think about back, you know, fifteen years ago, the cost of everything was cheaper. You know? It was cheaper to buy milk, bread, and eggs. So, basically, when you look at the real price of oil, it was a lot higher back in twenty ten to twenty fifteen. It skyrocketed in two thousand and eight to two hundred in real terms, meaning inflation adjusted terms. So even though oil prices have shut up, we've been here before. Like I said, we lived in this for almost five years between twenty ten and twenty fifteen. So we're not at this level, it will not cause a recession because we've had this before. And then even gas prices, I take a look at this chart. The orange area is just the price of gas. It's around four forty five right now when I last updated this chart. Once again, the blue line is in real terms, meaning prices, you know, ten years ago were a lot cheaper than they were today. So basically, in real terms, you know, sure it has jumped, but we've seen real gas prices a lot higher this back in twenty eleven to twenty fifteen and and other time periods. So, like, once again, it's not enough to cause a recession, but it will cause some what we call demand destruction. Meaning, when I spend more money at the gas pump, I have less money available to go out to restaurants or buy shoes for my kids and things like that. So demand will be destroyed by these high prices, but not enough to top us into recession. And then the last thing, number six on my list of what could cause a recession this year, lower quality office property. You know, since the COVID COVID pandemic, a lot of Americans are still working at home. So the occupancy in some of these offices have dropped dramatically, meaning the rents have fallen. And how do you price a piece of property? Well, just the present value of all future rents. Well, the pricing has dropped significantly. So when these owners of these office properties have to go into the bank or credit union to refinance that loan, typically, it's a five year balloon loan, They have a really hard time refinancing it. Basically, they're underwater. The value of their asset is less than what they owe on the property, and they're probably just walking away from the property, giving it to the bank, and the bank is experiencing a huge loss, which is causing financial instability in this country. You know? We have some banks and credit unions who are under capital stress as their capital ratios have plummeted because of these losses. Moving on. How are we doing with respect to car sales? This chart looks at US vehicle sales, the brand new cars, trucks, SUVs, how are we selling? Notice the box on the far right says in March of this year, we sold at an annualized pace, about sixteen point three million cars. That's down nine percent from what was a year ago. But remember a year ago, basically, lot of people were buying cars, tried to front run the tariffs that were coming by the Trump administration. But if you notice last few years, new car sales have been below my gold line, which is seventeen million, which is what we believe is a market equilibrium. That's because of high prices of cars and slightly high interest rates, car sales are little bit weak. But, of course, the Fed kinda wants that in order to bring inflation down, sell fewer cars. You won't see car prices rise as much. And we can see that from this chart right here. This is blue line looks at new car prices year over year are only rising about zero point five percent right now. That's down from look look what happened in twenty twenty two when car prices are rising, like, twelve, thirteen percent. Remember we had that supply chain problems with COVID, and we couldn't get these semiconductor computer chips from Taiwan. So GM and Ford weren't making too many cars. So we had car prices spike a few years ago, and then now they're rising again, but pretty kinda below the Fed's CPI target there of two point five percent. So they are rising, but not very quickly after that big rise. When it comes to used car prices, a little bit different story. The red line I've just added, look what happened to used car prices back in twenty one, twenty two. They're rising forty percent for a while there. Been the last few years, they've been in negative territory. And right now, year over year used car prices are down three point two percent. That does have ramifications for us at credit unions. Why? Well, my purple box at the bottom talks about, well, you get more loan charge offs when car prices are falling, decreased trade in values. You know, if my car is falling in price, don't get much trade in value. It's hard to buy a new car. And then you have a lot of underwater borrowers where people owe more on the loan than the car is actually worth. And so you have people, you know, maybe walking away from their from their car and their loan there. So car prices are starting to fall again. They were positive for a little bit there in twenty twenty five, but they've gone back to negative territory. Moving on, how is this impacting overall credit unions? Take a look at this chart. You can see the title there, Credit Union new auto growth. Basically, for the last two and a half years now, credit union new auto loan balances have been negative. They've been shrinking. Well, what's going on? Well, it's very simple. Loan repayments have been greater than loan originations. You know, if you really think about a simple flow model, more loans are being paid back faster than we're actually originating new loans, and so we have negative loan growth for two and a half years. That's pretty remarkable to have this going on outside of a recession. Notice those red bars I have in my chart are recession years. And you typically see, you know, maybe negative loan growth during a recession. But we've had two and a half years now of negative loan growth in new auto balances with outside, with no recession. A lot of it is just due to the repayment of some of those old loans that happened, basically, back in twenty twenty two. This is new loans. As we know, two thirds of all loan of all auto loans at credit unions are used autos. So of all auto loans, one third are new, two thirds are used. Well, let's take a look at the used auto chart here in green. So I noticed the title credit union used auto growth. That's also been basically negative or barely flat. So once again, over the last now two years, loans are being paid off faster than we're originating new loans. So the overall loan balance has not grown at all at creditings in the last two years. Now again, you can be originating a lot of loans, but if you're getting loan loan repayments or amortization of the principal faster, it actually is negative territory. What about credit cards? There's a chart looking at credit card. That's basically been negative now for the last six months or so. It's basically these high interest rates, as you know, a credit card interest rates are the highest they've ever been in American history. A lot of people are a little hesitant to to take on new debt and have been paying it down. And so we actually have negative growth going on right now with credit card balances. Some other categories, credit union fixed rate mortgages. You know, a lot of us, we get that thirty year fixed rate loan. You can see in the last couple of years, it's been a little bit weak, you know, because interest rates have gone up. People are locked into their old three percent mortgage. They don't wanna take out a new six and a half percent mortgage. But that grew about what? Lately, we're growing about four point nine percent right now. So still a little bit weak, but it is in positive territory at least. Where are some of the fastest growing categories? We've gotta have some good news here. Here's adjustable rate mortgages. Those ARMs, those ARMs, basically growing thirteen point five percent right now on a seasonally adjusted annual growth rate, all that good stuff. So basically, seeing decent growth in adjustable rate mortgages because of these high interest rates, people are choosing the adjustable rate and also with expectations that interest rates may be falling into the future if the Fed ever lowers interest rates again. And then the last category we'll look at right here, look at this home equity. You know, if you wanted the big category that's growing, it's home equity loans. Right now, they're growing at about fifteen point nine percent annual base. Once again, home prices rose dramatically over the last few years. And, basically, they've been taking out home equity because they have the equity because home prices rose so much. So we're seeing a nice increase there in home equity lending. But once again, when it comes to consumer lending, outside of mortgages, those autos and credit cards, they've been in negative territory. Moving on. How's the labor market doing? You know, if the labor market's strong, people like taking out loans. So we wanna keep the unemployment rate nice and low, everybody working. Here's a chart that right now, the unemployment rate's about four point three percent. Once again, is that good or is that bad? Well, notice my gold line. Four point five percent is what economists believe is full employment. If you've ever taken economics class, you know, you hear that word equilibrium. That's where supply is equal to demand. Right? We're here. The labor supply will be equal to labor demand at four point five. So, basically, we're right at, basically four point five percent. Notice the last few years, we've been below the gold line, meaning we had a tight labor market, meaning the demand for labor by, say, credit unions and manufacturers were higher than the supply of work. It was hard to find qualified workers to actually come work at a credit union and be a loan officer or something like that. So it's been a tight market, but it basically it's kinda loosened up a little bit as we've raised the unemployment rate. Now we can actually find some workers to come work at credit unions. How does this impact credit? You'll notice the blue line I've just added. The loan delinquency rate has been trending up over the last few years after hitting record low levels back in twenty one, twenty two. We're at about one point o two percent delinquency rate today, you can see by the black box on the far right. Meaning, for every hundred dollars in loans, a dollar two are delinquent. What should it be in the long run? Well, let me add a purple line to my chart here. The purple line is the natural delinquency rate, which is around point seven five. Meaning, normally, for every hundred dollars, you'd have seventy five cents delinquent, but we're actually at a dollar two. So it's abnormally high, which is a little odd. Let me actually take a look at the unemployment rate one more time here. Notice this chart, these bars represent quarterly now, the unemployment rate. Alright. But to that chart, I wanna add on credit union charge offs. You see the red line? That's the credit union charge off rate. We're up to basically eighty three cents is being charged off for every one hundred dollars in loans. What should it be? And when everything's right with the world, when the economy is good, the natural charge off rate is my gold line that I've just added of zero point five percent. Notice we're at eighty three. So instead of normally charging a fifty cents when the economy is good and the unemployment rate's right where it should be, we're actually at eighty three. So what's going on here? Why is it so high? And, basically, why was it so low back in twenty one, twenty two? So notice we are significantly below the goal line a couple years ago. Now we're significantly above the goal line. Well, let's just take a little stroll down memory lane. First of all, why was charge off so low in twenty one, twenty two? Well, we had all these pandemic errors supporting people artificially to suppress their credit deterioration. Think of it like this. During this time period, we had a couple things going on. Remember, we had stimulus payments of around three thousand two hundred dollars. Well, that helped keep people current in making their loan payments so we didn't have to charge them up. Number two, we had enhanced unemployment benefits. So if somebody was out of a job, they got a little bit more money to keep them current on their loans, so we're gonna have to charge it up. Number three, we gave student loan forbearance. We told people, hey. Don't worry about those three hundred dollars student loan payments each month. You don't have to pay those for a while. Well, they had freed up money to pay on their auto loan, say, to the credit union. Number four, eviction and foreclosure moratoriums. We weren't kicking people out of their homes, evicting them, from their apartment, things like that. And then the last one to help these people out during COVID was aggressive loan modifications. So when people were having struggling with their loan, we modified it for them. So these five factors push that red line below the gold line and basically below the natural charge up rate. Alright. So there's a history explaining that. But what's going on today? Remember I said today, we have the red line above the gold. So it's just been completely reversed in a couple years. And I basically have narrowed it down to eleven drivers of why we are currently seeing credit stress out there at Credit Union. When I go around the country, I give speeches. I talk to, you know, CEOs and CFOs and lending officers, and they say, yeah, there's things going on that are really unique to this current time period. Well, number one, because we ended all those pandemic era supports that I just listed, that created a what we call a stock of marginal borrowers, kind of a group. And basically, it has this latent credit stress that's just sitting there. So we call this a cohort effect. We have a cohort of these marginal borrowers that once the supports of the pandemic era were were stopped, basically, we're seeing all these people having credit issues today. Rather than you could you can can continue reading in my sentence here. Rather than the typical flow problem where people are just flowing, it's more of a stock problem. We have this stock of people that are having these problems. Number two on my list of why charge offs are so high today, just following real wages. You know, for a while there, we had inflation greater than people's wage growth. You know, for a while there, inflation was nine percent a year, but it may be only got a three percent raise. So my real wage, my purchasing power was declining. Also, we said this high price level, and that affects typically lower income people more. You know, lower lower income people spend more on rents and food and gas, and those really got impacted by high prices. Number three on my list, high rent inflation. We had a tight housing market for the last few years that create a lot of tight budgets and you know, what's the first bill you pay every month? You pay your rent first because you don't wanna be homeless. Then you pay your auto loan payment because you gotta stay in your house. Number four in my list, student loan payment resumption back in twenty twenty three. That divert a lot of cash flows from auto debt service to student loan payments. Alright. So we're seeing that effect. Number five, I just high interest rates on credit cards, home equity lines of credit, adjust rate mortgages. That's raising debt service cost and credit interest rate repricing is slow on the way down. As we know, the Federal Reserve is lowering interest rates, but basically how it works in economics. When the Fed raises interest rates, credit unions and banks are quick are quick to raise their rates on their say auto loans. But when the Fed lowers rates, we are a little bit slower to lower our interest rates. So we're not giving the benefit of lower rates back to our our customers. Number six on my list, just slow loan growth. Remember, this is a ratio charge offs divided by total loans. And the denominator is not growing very fast, and so we call that the denominator effect which is artificially pushing up this ratio. Number seven on my list, just high car insurance cost which is causing a lot of people to drop their collision coverage. They just can't afford it. So they may keep their liability insurance but they drop their collision insurance. Meaning, if I get in a car accident with you, I have liability insurance to fix your car, but I dropped my collision coverage so there's no money to fix my car. I stopped making payments to the credit union. Credit union calls me up saying, hey, Steve, we're gonna repo your car if you don't make a payment. I say, go ahead and take the car. There's no money to fix it and it's totaled. Well, that's gonna increase your charge offs because you're picking up a a totaled car. Number eight on my list, a more walk away auto repos from a lot of underwater borrowers from those high priced twenty twenty one, twenty twenty three cars. Remember, since twenty twenty one, twenty twenty three, we saw car prices skyed skyrocketed. People borrowed a lot of money. Those people are now underwater, and they're just walking away from these loans. Number nine on my list, the twenty twenty two vintage loan. A lot of these loans made in twenty twenty two, with really loose underwriting standards have now seasoned and are showing credit losses. So that vintage of loans, twenty twenty two, we kinda loosened some standards, made some loans we probably shouldn't have made. Number ten, a lot of the jobs we are creating today are lower quality jobs. They're more in the service sector. You know, we've lost about eighty thousand manufacturing jobs over, say, the last last year. They moved into more low wage service jobs. We have a very volatile gig income. You know, maybe if you're an Uber driver, that can be very volatile. And more part time for economic reasons. A lot more people have been switched to part time status from full time status because the firm says, you know, we we can't use your full time, but we wanna keep you on part time. Well, that's gonna have cause some problem for people making their loan payments if they've been forced to be part time from full time. And then the last one on my list, just following credit worthiness amongst those low to moderate income households which drive most consumer credit losses. You know, credit losses are, but you know, low to moderate income people and basically their credit worthiness has been under pressure for the last couple years. So I just put here the top eleven reasons why today's red line of charge offs are a lot higher than the gold line where it should be based on the economy. And so there's a lot of factors, lot of new things that happened because of the pandemic that we're still living through today. Moving on, how's inflation doing? Can we get inflation out of control? Because if we can get inflation down, the Fed may lower interest rates, which will help loan growth. Here's the chart. This is looking at inflation using what's called the core PCE. PCE stands for personal consumption expenditure. Core means we exclude the volatile food and energy sectors. And you can see right now through March of twenty twenty six, my little red box on the far right, about three point two percent. Basically, notice for the last two years, last twenty four months, we've kind of been averaging about two point eight percent. We've got kind of stuck in this new range. Now the Federal Reserve wants the red line to touch the gold line. Notice my gold line is the Fed's two percent target. The Fed's getting frustrated that they can't get the red line to head south and touch that gold line. Well, during their meeting last week when they know the Federal Reserve held their FOMC, the Federal Open Market Committee meeting last Tuesday and Wednesday, they were debating where is the path of inflation going forward? Could the path be up? Well, because of it, notice my little red box there. Because of the war, we have higher oil, commodity prices. We hear prices like fertilizer and helium, industrial products going up. Two, deglobalization. We've tried to build more stuff here in the country instead of buying, let's say, from cheap countries like the Philippines, disrupted supply chains. Well, that's gonna increase cost if we make things here. Number three, pass through of tariffs. A lot of firms have said, you know, if you still have these tariffs in there that they're gonna pass more of them along into to the final consumer. They have been absorbing some of these costs, reducing their profits, but they're gonna just pass them through. And then number four, zero immigration. Because we've shut down the southern border, we're not getting a lot of new workers. That's gonna create a tight labor market, and that's gonna push up wages which we pass along in the price of higher prices of goods and services. So we, you know, we could be on path, that red path there going up or we could be on the blue path. You know, Kevin Walsh, the new nominee for to be chairman of the Fed is saying, you know what? Because of AI, it is gonna enhance productivity so much. We're gonna have disinflation or deflation. Things may actually be cheaper because it's gonna enhance productivity, reducing cost, and just boost the economy. So we could be on the blue path. Also, shelter costs in my blue box. Why would that be? Well, if you deport two million people, that opens up a lot of apartments. They're gonna see falling rents take place of that and so we could for those two reasons, maybe we'll be on the blue path going forward. Alright. Basically, so bringing back to my little Federal Reserve chart, remember we saw this chart at the beginning and I had there in black on the far right path one, path two. Well, based on everything that we've just seen, most economists believe we're still gonna be on path two that inflation is still so high and and maybe treading higher for the rest of this year that the Fed is gonna have to hold rates or maybe even raise interest rates if inflation gets out of control. How's consumers doing? Take a look at this chart. This is chart on consumer confidence index and also the consumer sentiment index. So what economists do, we ask Americans, hey. How do you feel about your personal financial position? Feel about job security? You know, how do you feel about the economy, basically? Well, if you notice the gold area, I've got a little box there on the far right that says, the consumer confidence index is about ninety one point eight. Now you say, does the ninety one point eight mean? Well, it's just an index that's derived from a a survey. So it's just a way to compare the number today into the past. Alright. So we're at ninety one point eight. Is that good or is that bad? What's the rule of thumb economists use? Well, notice the blue purple line I've just added. The purple line says that if you drop below ninety, that typically leads to recession. So if you drop below the purple line of ninety, you're gonna have a recession. We're at ninety one point eight. So we are pretty close, you know, roughly around ninety two if you round up there. So that doesn't that doesn't look good. And we're basically on the cusp of going into recession by this measure. What about the blue line? The blue line is the consumer sentiment index. Let me put up a little box on that. You can see right about forty seven point six on the consumer sentiment index. This is a survey done by the University of Michigan. Basically, what's the rule of thumb for this one? The rule of thumb is if you're below eighty, which is my purple line, that typically means you're in a recession. Well, we're way below eighty. We're at forty seven point six. So according to this measure, we should be in a recession. The people are not feeling good about inflation and the war and the uncertainty and all that stuff. And so that could mean they could pull back on their spending. So far they haven't. So far they're still spending, but they're not feeling good about their current financial position. What's our forecast then for overall loan growth? Well, here it is. Credit Union loan growth, this is kinda the big chart of the day. Last year, twenty twenty five, we came in at four point five percent loan growth. That's pretty weak. Seven percent is my goal line. That's normal. We typically grow seven percent. This year, twenty twenty six, forecasting a little bit better, five point five percent loan growth this year. Why? Well, once again, a lot of those loans that were being repaid back from those look at the bar on twenty twenty two when we had nineteen point one percent. A lot of those loans are kinda running off the balance sheet here, and so we're not gonna have that headwind of all those loan repayments coming in. And so it's a little bit better five point five. And then next year, we're forecasting six point five, which is almost close to being back to normal there of the seven percent. So that phrase reversion to the mean, we're almost back to what we typically see. How about our overall loan quality looking at the allowance for loan losses as a percent of loans? Notice on this chart, basically, what have we been doing the last few years? Well, during COVID, I mean, twenty twenty there, we hit a dollar ten for every one hundred dollars in loans. So we kinda thought we had about a dollar ten of bad loans on our balance sheet. Basically, because of CECL in twenty three, it jumped to a dollar twenty seven for every one hundred dollars in loans due to the current expected credit loss model. Remember the old CECL model when we changed how we calculate the allowance account. And you can see where we're at today, a dollar twenty nine. So really, it kinda hit a new long run steady state if you will in the last three years of being, you know, a dollar twenty eight, dollar twenty nine the last few years. Alright. What's the bottom line for credit unions? Are our earnings gonna be better this year or worse? If you'll notice in twenty twenty five, the average credit union pulled in about seventy basis points in return on assets. So you can see by the title of this chart, credit union net income as a percent of average assets. We had seventy cents for every hundred dollars in assets under management last year. We're forecasting it to jump to eighty this year, which is good. It's above our gold line. It's kind of the long run average for the new twenty first century of seventy eight basis points. Next year, we're forecasting eighty five, so even a little bit better next year. So why are we expecting a little bit better earnings for credit unions? Well, take a look at that. My little blue box I've just added. Couple thing, rising net interest margins. You know, as I've been talking about all these loans being repaid back. Remember, all these loans had that three point five percent auto loans. Well, now we're lending that money out at five and a half percent. So we're seeing more yield on our assets or yield on our loans going up. And then my second bullet point, falling operating expenses. You know, more and more credit unions are incorporating AI into their credit union. Either with the call center staff or loan officers, the computer programmers using Copilot to help write computer code. We are seeing a slowdown in hiring by credit unions. And actually, some credit unions are reducing their headcount, reducing the number of employees because of our because of AI making them more productive doing more with less, more people are doing more with less input, that it could actually slow down their operating expense ratios. Both of these put together, we should see better earnings going forward for the next two years. So leaving it with some good news here for credit unions that we look a little bit better. Overall economic update summary, run through real quick. Below trend growth this year, about one point nine. Remember I said, two percent is normal, but one point nine is still pretty good. No recession forecasted. Two, inflation is gonna remain above target during the next two years. That's gonna frustrate the Federal Reserve. The Federal Reserve is gonna keep interest rates slightly above the neutral rate. Number three, unemployment rate rising to the natural rate of four and a half percent in twenty twenty six. So kinda right where it should be. Remember, I said four and a half percent is the the natural full employment rate. Number four in our list, short to mid short to mid straights, that's a Fed funds rate, may fall twenty five basis points at the end of twenty twenty six, or or the Fed just may keep interest rates where they're at. But they may fall twenty five. Let's say the Fed could give us a little bit of relief. And then here it is, the big one, credit and loan growth, below trend this year at about five point five percent. Like I said, normal is seven. We're at five five, not bad, but still a little bit of headwinds blowing at credit unions. And then the last one credit union ROA, return on assets expected to rise to eighty cents for every hundred dollars in assets this year, which is good news for credit unions. Alright. We'll take them out to questions at this time. Steve, great, great slides and data. Appreciate it. You're gonna make us a lot smarter. Steve, yesterday, there was a headline that the national debt exceeded GDP. It was, like, for the first time ever, I guess, or maybe it's a long time. But is there any cautionary tale there that we need to focus keep paying attention there? The yeah. Big concern there is, yeah, our debt to income ratio is now over a hundred percent. We are worried that if it keeps rising, that the rest of the world may find us not as credit worthy, you know, that's what credit unions do. We evaluate people's credit worthiness when making, say, an automobile loan. Well, the rest of the world may look at us and wonder if we are credit worthy. If they don't think we're as credit worthy because of all this debt, we could see interest rates start to rise. As you know, the ten year treasury is sitting around four point three percent today. That's still relatively low. It's kinda it's been where you know, it hasn't really changed much. But if we start to see the ten year treasury rise, you know, go to four five, go to four seven, go to five percent, that's a signal the rest of the world is pulling back and is worried about our credit worthiness. At this point, they are not. We're they're they're still buying our bonds. The the treasury, just in the last month or so, has sold a lot of bonds. I mean, we're running a massive deficit right now, which you would expect because we have a war going on. So they're selling a lot of bonds. So far, the bond sales have been quite orderly, meaning they've been able to find a lot of buyers out there, be they banks, credit unions, foreigners, Japanese, Chinese, that they're finding enough buyers to keep selling these. So at this point, even though we we have massive debts and for, you know, looking out into the future as far as the eye can see, we're gonna be running massive deficits. The world still views us as being very credit worthy. Good. Steve, I've been hosting our our economic webinars for five or six years now, and I've never never had not one, but two questions have come in about an asset class we don't normally talk about on here, but that's student lending. And I don't are you are you let me make sure if you're not prepped to answer this question, that's okay. But I know there's a bunch of rules gonna be changing in July that's gonna open up I guess the the questions are, are there any impact on credit unions or the opportunities gonna own up, or what should credit unions kinda be looking at with these student loan changes? Yeah. I I guess I don't I don't have much to add to to that topic. I'm not familiar with the student lending nuances, so I'm gonna have to pass on that one. Okay. Fair. And I know there's a I had to in fact, I I was aware of it, and I was, like, while you were talking, pulled up a AI quick search on that just to get up to speed a little better myself. So Yeah. Question I'll to do that too. I'll have the AI when we're done here. Absolutely. So sorry for those that ask the questions. We'll we'll have to take your research elsewhere, and we'll be doing some research here at Orgence for sure. The question, you did a really nice job on the kinda on the the charge offs. And the question is, I guess, kind of just expand that a little bit. Just the basically, the the question is, is it a frequency or is it severity? Which which is the one that's kind of out of those two is driving that number? Good. Yeah. Yeah. Yeah. Was thinking severity, like, how many people are actually defining Is the number or is it actually or is that is the event just bigger for every loss? Yeah. Actually, it's it's not mutually exclusive. It's both that we're seeing more because we have this huge cohort coming off those pandemic era supports for their income. And so we had a huge, like I said, a huge stock of people, a huge cohort basically being brought into the credit risk area now. And because of the fluctuation in new car prices, how they jumped and then how they crashed, new car prices were way up, now used car prices are way down, that the severity is also. We have both action taking place. You have more frequency and more severity keeping that charge off ratio way higher than it should be based on current macroeconomic data. Steven, last one, and then I'll I'll wrap it up here. Just, you know, that that that was fascinating, data you've talked about the stock market, the S and P five hundred. I know there's a lot of the magnificent seven. So are they really truly banking on, you know, AI to really keep that thing afloat? Because it's really kinda if you I think all the other stocks are about normal, but those ones are super inflated. Right? So but Yeah. Look at the magnificent seven stocks versus the other four hundred ninety three that make up the S and P five hundred. But, you know, there is an interesting paradox as as economists are looking at, and the paradox is this for AI. It's called the AI paradox. And it goes like this. Let's say AI is unbelievably transformative. It's just the greatest thing ever. Well, what could that lead to? Well, it probably lead to massive layoffs. Right? If it's so productive, you could see unemployment of say thirty million people lose their jobs because AI is just remarkable and like a lot of people on Wall Street think it may be. Well, if you if thirty million people get laid off, what does that do to the economy? You go into a recession. Because you have so many people, you know, out of work, not spending, that leads to recession. Alright. Go to the other extreme. Let's say AI is just blase. It doesn't really change things. You know, it's not the greatest thing since sliced bread type argument. Well, what is that gonna do? Well, those magnificent seven stocks that you just mentioned, Nvidia and those, they're gonna come crashing down. The bubble is going to pop. And, basically, the S and P five hundred could drop by, say, fifty percent. Well, if you have a fifty percent drop in the stock market, that creates a negative wealth effect. And remember I said the top ten percent which controls ninety percent of stocks, if they lose half of their wealth, remember, they're consuming fifty percent of everything made. And so they stop spending and you also go into recession. So if the AI is great, go into recession because of massive unemployment. But if AI is blase, it doesn't really change anything, we go into recession because stock prices crash. So you almost need a middle road where you don't want AI to be super great leading to massive unemployment. And you don't want it just to be blase and do nothing. You wanna be kind of in the middle there where it does increase productivity, but not to the point we have mass layoffs. Fascinating. Definitely something to watch. Fascinating. Steve, wanna thank you very much for your expertise and and, you know, speaking to our audience here today, and much appreciate it. I'm just got a couple more slides as we wrap this up. We have a conference coming up. Not too late to register and come come join us in Palm Desert. Sure it'd be a nice cool place to be at the first week of June, but, Justin, we have air conditioning. We'll take care of you. But we have one of the best lending conferences around. I know that's a little biased coming out, but truly is great customer base. We have partners are gonna be out there. We you know, our events team does a fantastic job of taking care of our our customers that attend this event and industry personnel that attend this event. So thank you very much, and we'll see you in June at the JW Marriott in in the Palm Desert. The other thing is that we just how you stay in touch with us. We have, you know, social media, LinkedIn, you know, Facebook, x, and also our on podcast that has a lot of great content. And just stay connected to us. We'd like to stay connected with you for sure. Wanna thank you all today. Have a great rest of your your, Thursday, and thank you again to Steve, our guest, and have a great day yours yourself. Thank you, sir.