In the near future, credit unions must prepare for a complex economic landscape marked by what industry experts term a “two-track economy.” This phenomenon, detailed by Bill Handel, Chief Economist at Raddon, highlights a growing disparity between robust corporate performance and the financial struggles of many households. As we look toward 2026, credit unions must navigate this challenging environment, emphasizing risk management while seizing selective growth opportunities.
### Understanding the Two-Track Economy
The two-track economy consists of two divergent paths: one marked by stability and growth at the corporate level, characterized by increasing corporate profits and stock valuations, and the other defined by financial pain for many households facing rising costs and stagnant wages. While Gross Domestic Product (GDP) growth is projected between 3% to 4% for 2025, many consumers are struggling to make ends meet.
Handel emphasizes that, although large corporations have positioned themselves well for potential downturns, everyday working families, particularly those living paycheck to paycheck, face mounting challenges. This divide is expected to persist into 2026, making it essential for credit unions to acknowledge and respond to these economic realities.
### Fed Policy and Interest Rates
Recent actions by the Federal Reserve, including a rate cut in September—the first in several years—have played a pivotal role in shaping the current economic landscape. Handel notes that this decision was influenced by external pressures, emphasizing the continued rivalry among Fed officials regarding future rate cuts. Although short-term rates have dropped, long-term yields have remained relatively stable, resulting in an inverted yield curve that is gradually shifting toward normalization.
Credit unions should carefully monitor these interest rate trends, as they will influence the lending environment. Reduced rates may create opportunities but also raise concerns regarding loan delinquency, particularly in auto loans and credit cards.
### Loan Portfolio Pressures
One of the most pressing issues facing credit unions will be the management of loan portfolios. Delinquency rates are currently elevated, echoing levels reminiscent of the 2008-09 financial crisis. The strain on household budgets means that delinquencies will likely remain a significant issue in the coming years. As such, credit unions need to adopt disciplined risk management strategies to protect their financial health.
### The Housing Market Landscape
Another area of concern is the housing market, which has historically been a bastion of strength in the economy. However, recent data indicates a cooling trend, with some regions experiencing year-over-year declines in home prices for the first time in years. Despite these challenges, there is a silver lining for credit unions: as consumers adjust to higher mortgage rates—now a reality that most will continue to face—first-time buyers, especially older Gen Zers and younger Millennials, may start to re-enter the market. Credit unions need to be positioned to meet this demand.
### Political Considerations and Economic Stability
Recent discussions regarding governmental shutdowns may seem alarming, but Handel downplays these events as primarily “political theater.” He believes that any disruptions will be short-lived and that the broader economic impact will be limited. The expectation is that most federal workers will receive back pay, negating long-term economic effects.
### Navigating Forward: Risk Management and Growth
In summary, credit unions are standing at a crossroads. The next 18 months will test their ability to balance risk management with the pursuit of growth opportunities. Key strategies include:
#### Manage Auto and Credit Card Portfolio Risk
Given the heightened delinquency rates in these sectors, credit unions must focus on maintaining the quality of their loan portfolios. This will involve reassessing lending criteria and monitoring member financial health closely.
#### Seize Mortgage Lending Opportunities
As younger generations look to enter the homeownership market, credit unions should be poised to capture this demographic’s interest in mortgage products. Effective marketing strategies tailored to the needs of these first-time buyers could drive growth in this segment.
#### Explore Home-Equity Lending
With property values stabilizing but remaining high compared to incomes, home-equity lending holds potential. Credit unions can offer valuable products that assist homeowners in leveraging their equity while managing their financial situations.
### Conclusion
In the face of a two-track economy, credit unions must remain agile and strategic. While the current dynamics pose challenges, there are also opportunities for those willing to adapt to new market conditions. By focusing on disciplined risk management in areas of potential concern, while actively seeking growth in underserved markets, credit unions can position themselves to thrive through 2026 and beyond.
With a commitment to understanding the evolving landscape, credit unions can play a crucial role in supporting their members while navigating an economy that presents both obstacles and opportunities. Engaging with consumers empathetically and strategically will be the key to success as we move into a complex future.
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