Whatever happens, a new normal is coming.
Lending planners want economic insight, so they listen to economists. The questions economist Steve Rick keeps hearing from credit unions is what will happen to inflation and interest rates.
“Long-term interest rates will rise one percentage point over the next year,” says Rick, the chief economist of Cuna Mutual Group, Madison, Wisconsin. “Expect short-term interest rates to start rising in the fourth quarter of 2022.”
Inflation is a concern. Many economists are cautiously optimistic that price spirals will end once supply catches up with demand for goods showing the steepest price increases, but economic consultant Bill Conerly, based in Lake Oswego, Oregon, is cautiously neutral.
“Increased supplies will make some difference,” he says, “but the Fed is supplying a lot of liquidity during a recovery period.” Rates will go up eventually, most agree. While many of his colleagues are predicting 2023 for the upturn, he’s thinking summer of 2022.
North of the border, economists are predicting that the Bank of Canada will raise rates three times in 2022 and twice in 2023, which will help, reports CUES member Tammy Buchanan, SVP/CFO of $1.72 billion Northern Credit Union, Sault Ste. Marie, Ontario.
Whatever rise is coming won’t be enough to supply needed interest income, warns Anirban Basu, chief economist of Sage Policy Group, Baltimore. Many CUs will need noninterest income to survive, and they don’t have the economies of scale and the profitable trading desks that large banks have.
“Without enough net interest income and with the high costs of leading-edge technology and compliance,” he says, “credit union overhead will have to come down, which means consolidation. 2022 should be another year marked by mergers.”
Rates will rise slightly, predicts CUES member Derek Fuzzell, chief financial and chief strategy officer of $290 million PAHO/WHO Federal Credit Union, Washington, D.C., but CUs will still be living in a low-rate environment for the foreseeable future.
“We’ll still be stuck in the new normal, with low net interest margins, trying to find ways to make that work,” Fuzzell says.
CUs should look to their data more than to economists to set expectations, recommends Micheal Herman, president of CUESolutions provider AdvantEdge Digital, Madison, Wisconsin, a business line of Cuna Mutual Group. “Properly analyzed, the data can show which members are candidates for which loans. If the CU provides tools like financial calculators, it can track how members are using those tools to see who may be getting ready to buy something big.”
Loan Flows and Inventory Dams
Heading into 2022, loan demand is being suppressed by a shortage of the things members would like to buy with CU financing. Spend is waiting for inventory, Conerly points out. Early in the brief recession, merchants had too much inventory and cut back a lot. Now that has flipped dramatically.
“Airlines reduced flights, stored planes and laid off staff,” Conerly notes. “Now they’re scrambling to catch up to surging demand. Car rental agencies thinned their fleets. Now they can’t rebuild them fast enough. So there are shortages and prices are sky high. Who will spend $200 a day for a rental car?”
Cars, both new and used, are scarce and expensive, he continues. “Boats are on back-order. High-end bicycles are hard to find. There are shortages all over.” Many consumers are flush with cash and have paid down loans, especially credit card balances, he reports. “They have the money and are gaining confidence, but it’s still hard for them to find stuff to borrow for.”
“There’s no segment of the loan market that doesn’t have supply-side issues,” reports CUES member Bill Vogeney, chief revenue officer of $8.3 billion Ent Credit Union, Colorado Springs, referring to a shortage of homes, contractors to do home improvements, cars, RVs and motorsport items.
Mortgages are bigger these days due to the short supply of houses and soaring prices in a strong seller’s market, Conerly notes. “New construction is up, but developers are finding that buildable lots, construction materials and labor are all in short supply.” But there’s no bubble, he insists, just a sound market constrained by a shortage of product.
Inventories will recover, probably by 2022. There aren’t enough new cars because there aren’t enough computer chips that today’s cars require. The shortage is temporary, notes Basu, but cranking out more chips takes time.
“They are a complicated item to produce,” he notes. He thinks the supply might not meet the demand completely until the first or second quarter of 2022. Meanwhile, cars are expensive—used car prices were up 45% during a recent 12-month period.
Even when vehicle production recovers, fierce competition likely will mean CUs in most markets will have to fight for their share and live with modest margins, Conerly adds.
Home building already is ramping up, and 2022 should bring mortgages back to the market, according to Conerly. CUs could see more mortgage originations in their pipeline at larger sizes with more members qualifying due to larger savings, greater home equity and fatter retirement balances.
Richard H. Gamble writes from Grand Junction, Colorado.