Don’t Get Down On Soft Loan Demand

Soft loan demand may be one economic indicator that’s not so whacky.


It cracks me up when I see bizarre economic indicators such as The Overeducated Cabbie Index, The Speed at Which Contractors Return Calls Index, or The Hot Waitress Index, as a New York Times article describes. I'm usually skeptical of any clues to the economy beyond GDP trends, housing market movements, or the unemployment rates.

But then I read Navy Federal Credit Union ($44.4B, Merrifield, VA) CEO Cutler Dawson's interview with the San Diego Union-Tribune, where he describes another possible economic indicator: soft loan demand. Loan balances have flat-lined following the recession and Cutler says he thinks that's actually a good sign. I think he has a good point. Here’s why: in the financial industry, less demand for loans can signify more responsible spending behavior on the part of borrowers and thus a more stable economy in the long term. Perhaps soft loan demand is forecasting a healthier economy — just like men's underwear sales are alleged to do, according to the Underwear Index described by the Washington Post.

Click graph for larger view | Source: Callahan & Associates' Peer-to-Peer

Loan balances grew steadily from 2003 through 2008, then the growth leveled off in the first quarter of 2009, staying fairly flat since then, according to Callahan & Associates’ Peer-to-Peer data. Loan volume or the number of loan originations increased in the second quarter, but the average loan amount declined in the second quarter. Many credit unions, such as Navy Federal, view demand as still soft. And that's likely because borrowers are more savvy and more conservative, making them financially stronger.

Click graph for larger view | Source: Callahan & Associates' Peer-to-Peer

In this case, a CEO is okay with making fewer loans — which translates into less returns — because he expects his members to be more reliable. He can trust them more with making financial decisions. Sure, the average amount of auto loans has declined, but that’s because consumers are more seriously reflecting on what they can afford and not borrowing outside of their means.

And as members tighten their financial belts, credit unions can be confident they are giving members a manageable loan. When members are prepared for unexpected financial setbacks, when they have growing emergency savings, and when they control their spending and saving, they create a safer loan environment and a more sustainable economy.

Credit unions benefit because they are able to invest the excess cash in deposits. Credit unions can invest the deposits from members with countless options. Investing doesn’t create the same return as creating loans, but it's a better option for both the credit union and the member than having high loan default rates. The credit union can turn the investments into the higher yielding loans when the time is right for the member.

As our economy slowly recovers, we’ll likely see more loans made with lower default rates. For now, I’m going to look at the current soft loan demand as a more positive economic indicator — one I have a little more faith in over a hot waitress index or underwear sales.


Sept. 19, 2011


  • Very interesting.
  • I agree with what you are saying, however, an economy where people are afraid to spend is not a good long term solution. Spending has to increase to create jobs. That being said, we were clearly overspending for 10 years straight. That needed to be cleaned up. Lets hope we can find a happy medium.