Editor’s note: This feature first appeared in the April issue of Auto Finance News, available now.
As major auto lenders provide relief for new and existing customers, it is unclear whether consumers will be willing to conduct large purchases after shelter-in-place directives are lifted around the country. Black Book, for one, is predicting “substantial drop in consumer confidence” as it relates to buying “big ticket items.”
Weeks after the outbreak, the U.S. economy is feeling the effects of the novel coronavirus pandemic. Cases of COVID-19 have popped up in all 50 states, and jobless claims have soared to record highs, clocking in at 3.3 million on March 26, an increase of over 1,000%, according to the Department of Labor. By comparison, jobless claims came in at 281,000 the previous week.
Consumers still employed are finding their income negatively affected, according to a survey of conducted by TransUnion. “The coronavirus pandemic is creating a new reality as its impact has stretched to consumers of all generations and income levels,” said Satyan Merchant, senior vice president and automotive business leader at the credit reporting agency. “Over half of Americans say that the COVID-19 outbreak has already negatively affected their household income. And 45% of these consumers say, at the very least, their work hours have been reduced.”
Further, consumers expect to be behind, on average, $900 on payments they owe, according to the survey.
In early March, other data sets pointed to a more optimistic outlook. While consumers paniced, hoarding toilet paper and disinfecting wipes, “there [was] little evidence that the panic [was] due to the escalating downturn in business activity and mounting job losses,” according to Richard Curtin, chief economist at the University of Michigan’s Survey of Consumer Sentiment.
Yet, consumer sentiment still dipped due to the spreading coronavirus and the steep declines in stock prices, Curtin said. However, the initial response to the pandemic had not at the time generated the type of economic panic among consumers that was present in the run-up to the Great Recession. Simply put, consumers were more concerned about their physical health than their financial health.
In less than 30 days, however, that all changed. On March 27, the Survey of Consumer Sentiment index dropped 9.5% year over year to 89.1, the fourth-largest single-month decline in 50 years, according to the most recent survey results from the University of Michigan. The three other largest declines in the index were related to Hurricane Katrina and the recessions of 1980 and 2008.
“The 1980 and 2008 collapses in consumer confidence sparked long and deep recessions,” Curtin said.
Data suggests that further declines in confidence are likely to occur in the coming months as the spread of the virus accelerates. Further, it will be difficult to stabilize consumer confidence as unemployment rates increase and household incomes fall.
“Mitigating the negative impacts on health and finances may curb rising pessimism, but it will not produce optimism,” Curtin said. “There is no silver bullet that could end the pandemic as suddenly as the military victory that ended the Gulf War,” he explained, noting that “economic policies must quickly adapt to a new era that will reorder the spending and saving priorities of consumers,” in order to avoid an extended recession.
Prior to the COVID-19 outbreak, there were rising concerns around consumer affordability in the industry, particularly in the subprime tier. A prolonged recession could exacerbate that problem.
Auto loans are the third-largest category of consumer debt, behind only mortgages and student loans, according to a February letter submitted to the Consumer Financial Protection Bureau by lawmakers. By yearend 2019, there were more than 115 million auto loan accounts open totalling $1.33 trillion. Now, that mounting debt could prove problematic in a recession when it comes to consumers paying their auto loans.
For subprime lender Gateway Financial Services, consumers prioritize paying off other debts before car loans. “Affordability is key,” said President Kristin Karwat during an industry conference earlier this year. “But when you are in the subprime space, you see consumers are more willing to pay their cell phone bill before their car loan.”
Pile on the negative impacts from the coronavirus pandemic, and an “increased pressure on the affordability crunch” is unavoidable, said TransUnion’s Merchant. “We forecast auto originations will slow significantly due to factors such as a rise in unemployment and reduced work hours for many consumers, along with reduced dealership hours.” At last count, TransUnion’s Industry Insights Report noted third-quarter auto loan originations totaled 7.3 million units, flat year over year.
Lease options are typically a more attractive option for consumers in a recessionary economy. Yet, the impacts of COVID-19 outbreak and containment efforts have made a “significant” impact on consumers desire to spend, said Scot Hall, executive vice president of operations at Swapalease.com.
“Part of this stems from the fear of the economic unknown, and part of this is as a result of their desire to refrain from shopping at stores,” Hall said.
Though the lease retailer’s website is still seeing some traffic from consumers, this activity reflects consumers looking to escape a lease they feel they can no longer afford, Hall noted. “While no one has a crystal ball, the severity of the current situation most likely depends on whether this lasts six to eight weeks, or if it persists three to four months in length,” he said.