Lending practices and consumer behavior can vary due to many factors, but overall, consumer lending cycles tend to correlate highly with general economic cycles. Lending activity expands during periods of economic growth and contracts during recessionary periods.
Monitoring economic key risk indicators is essential in an environment of uncertainty and volatility so that organizations can adjust proactively their strategy. You can’t change the direction of the wind, but you can adjust your sails to reach your destination.
The following are some of the top economic indicators for consumer lenders:
GDP (gross domestic product) – GDP growth signals the overall strength of the economy and consumers’ capacity to repay credit obligations.
Unemployment rate – Rising unemployment can lead to decreased consumer spending and credit losses.
Household debt levels – High levels of household debt may increase the risk of loan defaults and impact consumers’ ability to take on additional debt.
Personal income and disposable income – Increasing income levels generally represent a higher capacity for borrowing and repayment.
Interest rates – Changes in interest rates impact borrowing costs for consumers and influence loan demand and affordability.
Consumer spending – Lenders should monitor consumer spending data to gauge the level of economic activity and potential borrowing needs.
Consumer confidence index – Higher consumer confidence levels indicate a greater willingness to borrow and spend.
LEI index – Published monthly by the Conference Board, the Leading Economic Index has 10 components (listed in the image below). The index is designed to signal peaks and troughs in the business cycle, some of which contain financial components and non-financial components that are both highly correlated with real GDP.
LAG index – Also published monthly by the Conference Board, is the Composite Index of Lagging Indicators (LAG). This index includes key lagging indicators, such as the ratio of consumer installment credit outstanding to personal income and the real (inflation-adjusted) dollar volume of outstanding commercial and industrial loans.
In addition to the economic indicators listed above, there are other factors that impact consumer lending, such as changes in regulations, technological innovations, and the behavior of competitors. By monitoring these factors, lenders stay ahead of the curve and make sure that their lending businesses are well-positioned for success.