With less than four months left in 2011, this year could easily go down as the period when consumers shifted hard from buying to paying down debt and stockpiling rainy day funds.
Turn the clock back a few years, and the nation was in the midst of a negative savings rate environment. Many Americans did not think twice when it came time to buying a house or a new car versus building a six-month emergency coffer.
Then the recession hit. Layoffs, furloughs and unemployment coupled with a still uncertain housing market and threats of yet another downturn changed many financial habits.
Nowhere is that more evident than with where members are parking their savings. The latest credit union data shows that individual retirement accounts were leading the pack in July. The accounts grew by 4.1% followed by share drafts at 2.1% and money market accounts at 0.48%. Meanwhile, certificate account and regular share balances dropped during July.
Looking at the total distribution of all savings at credit unions, regular savings accounts were still the go-to for most members at 30.8%. Coming in second were CDs at 25% and MMAs at 22.7% with share drafts and IRAs at 11.8% and 9.8%, respectively.
Despite the gains, savings growth was 0.13% for the month, putting it behind total loan growth, according to CUNA data. While loan-to-savings ratios barely budged from 69.6% to 69.7% in July, the small move still managed to be the third consecutive increase this year, according to CUNA Senior Economist Mike Schenk.
Regardless of how small the savings rate has grown, members continue to seek a flight to safety from the equity markets, said Dave Colby, chief economist at CUNA Mutual Group.
“After the events in Washington over the past several weeks, the S&P downgrade and results in the equity markets, we should prepare for yet another flight to safety, even with yields at all-time lows,” Colby said.
In the midst of it all, Colby said credit unions should expect members to continue to pay down debt and slowly build their savings. Indeed, member savings are up 3.3% through the first half of 2011 and 4.5% over the past year, he added.
“While current results look like a typical post-recession trend, usually deposit growth slowdowns are accompanied by a pickup in loan growth. Member households continue to reduce debt as their primary balance sheet repair strategy,” Colby said.
Further proof that debt payoffs are a priority for many came from the NCUA’s latest Call Report data. While delinquencies remain near historically high levels, the regulator recently reported that they continue to trend downward. In the second quarter, credit unions reported a loan delinquency ratio of 1.58%, which was a five basis point improvement from the prior quarter. The net charge-off ratio declined to 0.95% in the second quarter, also amounting to a drop of five basis points from the end of March.
Even though the loan delinquency rate dropped below the 1.6% threshold for the first time in two years, Colby said this credit quality indicator still has a long way to go before the industry sees its long-term average rate of 1.038%.
“Barring any economic or credit markets shocks, this trend will continue,” Colby said.