Inflation and recession are top of mind for credit union leaders and members alike going into the last quarter of the year. With two consecutive quarters of contracting GDP this year, some argue recession is imminent while others highlight factors suggesting otherwise.
Overall, economic growth has declined, but the decline has remained shallow compared to 14 years ago. Between the third quarter of 2008 and the second quarter of 2009, the U.S. experienced four consecutive quarters of negative GDP growth, with a dip of -8.5% in the fourth quarter of 2008. Comparatively, the first two quarters of GDP contraction seem more modest, at -1.6% in the first quarter of 2022 and -0.6% in the second.
The most significant economic recessions of the 2000s were credit-driven. The dot com bust of the early 2000s as well as the subprime mortgage lending crisis of 2008 were the result of speculative capital and credit flows that proved faulty. However, unlike 2000 and 2008, the current economic shrinkage is inflation-driven. Excess liquidity, not debt, would be the catalyst for any potential recession that could occur today.
Government stimulus efforts that pumped money into households and investment markets have led to a decline in the purchasing power of the U.S. dollar. At the same time, continued imbalances of supply and demand in the mortgage and auto markets are keeping prices high while recent interest rate hikes have made financing more expensive.
Unemployment, another major indicator of the economic climate, is also at a healthier place than in the most recent recession. In the fourth quarter of 2007, the national unemployment rate was 5.0% and had been at or below that rate for the previous 30 months. At the end of the recession, in the second quarter of 2009, unemployment was still at 9.5%. In contrast, the unemployment rate at the end of the second quarter of 2022 was a near record low of 3.5%. Today’s labor market is also showing record high ratios of new job openings to potential job applications, with the new jobs rate at 6.8% as of June 2022.
Then And Now
Despite the strain to the overall financial services industry, credit unions were poised for growth during the Great Recession. The industry sustained double-digit loan growth for first mortgages for five consecutive quarters from the first quarter of 2008 to the first quarter of 2009. Average annual loan growth for first mortgages throughout 2008 was 13.0%. This was the only time first mortgage growth reached close to the most recent housing boom in 2020 and 2021. Compared to 2013 and 2014, when GDP growth was consistently positive, the annual average loan growth for first mortgages was only 2.6% each year.
Similar to the economic environment at the height of the COVID pandemic, the Fed’s reactionary monetary policy — which dropped interest rates to near zero — encouraged consumers to borrow. Furthermore, credit unions provided a necessary and secure alternative for mortgage financing, and credit unions’ mortgage market share doubled from 2.4% in the second quarter of 2007 to 4.8% a year later. Credit union mortgage market share averaged 5.6% throughout 2009 and has steadily risen every year since then. Average market share was 7.4% throughout 2021 and hit 8.3% as of June 30, 2022.
On the earnings side of the credit union balance sheet, income growth contrasted loan growth. In times of economic shrinkage, the Fed’s interest rate adjustments impact revenue the most. Consequently, lower interest rates impacted earnings.
Despite high loan and asset growth from 2007 to 2009, lower interest rates resulted in negative total income growth for three out of four quarters in 2009. However, industrywide return on assets (ROA) faced a V-shaped rebound during the Great Recession. After a dip of 146 basis points between the fourth quarter of 2008 and the first quarter of 2009, ROA returned to a positive 0.29% at mid-year 2009, staying steadily positive and increasing year-over-year. Industrywide ROA in 2021 stayed consistently above 1.0% each quarter and is now leveling off, closing out the second quarter of at 0.86%.
Higher loan growth from 2007 to 2009 also kept the loan-to-share ratio sufficiently healthy, at an average of 81.8% in 2008 and 77.4% in 2009. Comparatively, the industry loans-to-shares ratio averaged 69.6% in 2021 and closed out the second quarter of 2022 at 74.7%.
On the whole, the Great Recession was an opportune time for the credit union industry to grow its loan portfolios for longer-term earnings and higher market share. Despite the short-term decline in earnings, cooperatives were not only attaining more business but also serving loan purchasers as they lost confidence in traditional private banks. Lowered interest rates in 2008 and 2021 have also allowed the industry to serve those who might not otherwise have been able to attain home financing at any other time.
The Credit Union Perspective
In times of economic shrinkage and recession fears, the credit union mission becomes integral to the financial wellbeing of existing and potential members. The objective to reach those who are most vulnerable to economic shocks has helped keep member-owners — as well as credit unions themselves — more resilient in the long term.
The industry has thrived in previous recessionary periods, increasing its market share and sustaining growth. Cooperatives have also served as a reliable alternative to traditional banks and private, non-deposit-taking lenders, particularly during periods of economic volatility.
As a sign of commitment to members, credit unions are more likely to think of the entire loan lifecycle with the goal of taking care of members, not simply making a profit off them. At the same time, creating a balance of capital, provisions, and liquidity can help determine a short-term risk appetite that allows each institution to thrive in any economic downturn.
Laila Jiwani is a former industry analyst at Callahan & Associates.