How credit unions can navigate current macroeconomic trends

Publisher’s Note: CUInsight is hosting a free webinar Wednesday, April 3 titled, “Macroeconomic Trends Impacting Credit Unions”. We hope you’ll join us! Register here.

We recently passed the four-year anniversary of the start of the COVID-19 pandemic, and though the pandemic is behind us, we continue to feel its aftershocks. Notably, the ripples of the pandemic are still shaking up our economy, leading to continued inflation, high interest rates and the continued looming reminder that what goes up, must come down. By looking back at the events of the last four years, we can better understand our present and attempt to predict the coming changes to the economy.

Cause, effect and unintended consequences

When quarantine started and everyone started staying home, the government assumed that the furloughs and reduced spending would result in a market crash. And while some certainly found themselves affected by the furloughs of early 2020, by and large, the US found itself back on its feet fairly quickly and not just surviving but thriving.

The pandemic years saw a strange combination of hiring booms, increased wages and government stipends. The sudden boom in wealth for many Americans led to increased purchasing, especially as those who were quarantining looked for ways to entertain themselves. Combine that with manufacturing shutdowns and supply chain disruption, and the market was ripe for inflation. By Q2 of 2022, inflation had reached over 9%, and the Fed was forced to sharply raise interest rates to try and bring it under control.

The state of the economy and what it means for credit unions

Today, we’re still grappling with inflation and high interest rates. We’ve come down from the 9% inflation of mid- 2022, but at 3.2%, we haven’t yet reached the 2% that the Fed targets. The good news is that the Fed expects to bring inflation under control this year, thus enabling them to lower rates. The bad news is that the Fed is notoriously inaccurate in predicting what they’re going to do. Inflation has already been higher this year than they’d expected, resulting in delays in even beginning to lower interest rates.

So, what does this mean for your credit union? Your credit union has likely already started noticing that inflation and high interest rates are hurting member pockets, resulting in a rise in delinquent payments. Right now, it’s important for your credit union to carefully consider how many loans they want to offer and keep a close eye on how much they’re keeping in reserve. Now is a good time to invest in a good CECL program. Predictive models can help you determine which members are most likely to default, too.

Your credit union should also have a strong refinance program ready to capture or retain loans once interest rates do start coming down. If one of your members has a car loan at a 6% interest rate and a big bank or fintech reaches out to them with a refinance offer at 4% in a few months, you might lose that member, and any others who receive the same offer. But if you can beat them to the punch, you have the opportunity to not only retain your current members but bring in new ones with the offer of better rates and lower payments.

When it comes down to it, the best advice for planning for the future is just to watch and be ready for any outcome. If your credit union is prepared to take action the moment rates come down, you may be able to come out of this on top.

Don’t forget to join CUInsight and Trellance for our free webinar titled, “Macroeconomic Trends Impacting Credit Unions“, on Wednesday, April 3. Register yourself and a colleague here.