Three Economic Waves Now Impacting Credit Unions

In our economy, just like on the water, major disruptions are not over right after the trouble has passed by. In our current “economic lake,” there are three distinct waves that have been created by the “speedboat” of our global pandemic. Credit unions can benefit for looking out for the following three.

Wave One: Supply Chain Disruption

With the onset of COVID-19 and the shutting down of manufacturing and limiting of onsite work to “essential” personnel, the auto market changed quickly. We went from a market where car manufacturers and dealers were begging the public to buy their inventory through heavily discounted prices to a situation where the prolonged chip shortage and lack of manufacturing created empty lots and not enough vehicles to go around. As any good student of economics can tell you, the lack of supply and the excess of demand leads to higher prices.

The impact of this has just now begun to be felt in the used car market. Low-cost vehicles that we would now expect to see being traded in for new cars are just not widely available in the used car market. Those that do exist move at a high speed, staying on the market in some cases only hours. What’s a used car buyer to do? They must wait for those nicer, high-end cars to hit the market at a price they can afford, which may mean another year or two before buying.
 
In addition, the buyer who purchased that high-end car during the pandemic is likely to hang on to it a year or two longer to get more value from the price they paid. Manufacturers are slowly bringing back production of low-cost vehicles, but it will be years before this wave and the following ripples work their way through the economic landscape (waterscape?).

Wave Two: Inflation

As stimulus money inflated bank accounts and drove down consumer debt and as businesses closed or limited hours, people had money to buy goods and services but limited places to spend it. More money chasing goods and services created a perfect environment for inflation to start to spiral. Groceries, energy and cars all took significant jumps.

As inflation continues to be an issue, many households have moved from having to decide how to spend their extra dollars to instead having to decide which bills will get those dollars. As a result, lenders are back in the full swing of collections as delinquencies rise. Unfortunately for lenders, an increasing delinquency rate can move quickly into increased charge-offs. 

The inflation wave is just now being felt in the lender space, and the expectation is that 2023-2024 will be challenging for the bottom lines of many lenders. Staffing shortages combined with salary inflation, combined with more demand for repossession, skip tracing and remarketing services than market supply currently provides lead to anecdotal stories of lenders spending extra money to have their vehicles bumped in priority so they won’t be left out. 

It doesn’t take long for all of these forces to combine to create a new higher price point for everyone—and so inflation continues.

Wave Three: Interest Rates

In a bid to combat inflation, the Federal Reserve has continued to raise interest rates. Rates climbed steeply from 3.25% to (at the time of this writing) 8% in the space of less than a year. While the rate of increase has started to taper off, the impact is undeniably being felt in many areas. 

In the housing market, lending has cooled significantly as:

• Refinance activity has virtually dried up.
• Inflated home prices plus significantly higher mortgage rates have priced many buyers out of the market altogether. 

Similarly, in the auto market:

• Buyers who would normally trade in their vehicles for a new one are looking at either a huge increase in the monthly payment amount or a one- to two-year extended term on the note.
• Many of those buyers are deciding to hang on to the vehicle they have.
• For those borrowers who do take the plunge, even small changes in their economic reality could lead to delinquencies, defaults and repossessions—making the risk much higher for their lenders.

Historically, the labor market has to tighten significantly to rein in inflation. That hasn’t happened yet. The Fed is being cautious in an attempt to not make that a reality, but the final outcome remains to be seen. The impact of this wave has shifted the water line but stay tuned for more turbulence.

Naturally, all boats aren’t the same size, the same design, or heading in the same direction. Each lender has to examine its own unique boat to determine the best way to position it to ride out the waves and hopefully return to calmer waters—at least until the next jerk in a speedboat comes along to stir things up.

Loren Shelton is VP/insurance solutions at State National, a CUESolutions provider. He manages the underwriting, claims and new business implementations for a portfolio of more than six million loans. With more than 23 years of experience, Shelton has extensive knowledge of State National's collateral protection products. For a personalized consultation regarding ways we can help your credit union ride out this storm with reduced risk, reduced charge-offs, and greater peace of mind, contact our CPI experts.