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What trade wars, tax reform and more mean for CU auto lending

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This story is part of Credit Union Journal's ongoing special report on auto lending, which will run throughout the month of May. Additional coverage can be found here.

Consumers’ fears about a recession could affect auto sales, which in turn could have a big impact on credit unions’ bottom lines.

Two economists offered differing portraits of what the next 18 months could hold when speaking during CU Direct’s DRIVE conference last week in Las Vegas.
“If people fear a recession, then they will not buy a big car,” said Charlie Chesbrough, senior economist and senior director, economic industry insights at Cox Automotive.

The financial markets are suggesting a recession might be ahead, especially the inversion of the yield curve, Chesbrough continued. “Folks are nervous about lending money over the near term, which historically has led to a recession.”

The Cox Automotive forecast for new vehicle sales overall is light vehicle sales will decline in 2019 to 16.8 million, then 16.5 million in 2020 before recovering. According to Chesbrough, one of the biggest issues behind the scene is affordability. He said prices have been rising “dramatically,” which is pricing many consumers out of the market. The average MSRP is approaching $40,000, which would be the highest ever.

Conversely, Dr. Elliot Eisenberg, chief economist for GraphsandLaughs, LLC, an economic consulting firm, offered a different take, noting that while a recession is a possibility, a variety of strong economic indicators say otherwise.

“Today, I am giving you a 10-month warning,” said Eisenberg. “I am not certain there will be a recession, but there are a tremendous number of threats to economic health. They might be resolved and everything will be fine, but if enough go south then there might be a problem.”
The economy is solid, though GDP is slowing slightly, Eisenberg noted, adding auto purchases are down and auto lending growth has bottomed. U.S. light vehicle sales peaked two years ago and have fallen slightly since topping 17 million units sold in 2017 and 2018.

“Mild cooling, not recession-inducing, but slowing,” he assessed.

Household consumption is good, as is government spending. Eisenberg told the audience when those two components strong, it is almost impossible to have a recession because the other components of GDP are relatively smaller.

The factors that give encouragement include the fact the stock market is doing “very well,” Eisenberg continued, as the S&P is near its all-time high. Total household debt is 6.9% higher than the previous peak in 2008. But as a percent of GDP, American consumers are in “spectacularly good shape.”

If there is a recession it will be because of corporate problems, not household problems,” he said.

One troubling factor, he pointed to, is that auto loan defaults have risen steadily since 2015, but Eisenberg said that is partly because the population is bigger and there are more loans out there. Eisenberg said the fault is not on credit unions, nor it is on banks, as the majority of defaults have been in subprime loans made by finance companies.

Taxes, tariffs and more

Both economists discussed President Trump’s 2017 tax reform law, with Eisenberg predicting “The impact from the tax cuts is slowly weakening, and by the end of 2019 will have zero impact.” And, he added, Congress is likely to increase spending within the next year “because neither party wants a recession going into the next general election.”

Chesbrough said tax reform is likely to create more fleet activity, because business use of depreciation deduction allowances expanded dramatically. “I would not be surprised to see more businesses give workers a company car rather than a raise,” he predicted.

The share of the market by new vehicles below $30,000 MSRP was 36% in 2018, down from 54% in 2012. Chesbrough said heavy fleet and lease sales may produce near-term gains, but lead to longer-term pains. It will lead to a “tremendous amount” of used vehicles in coming years that will compete with new cars, or “self-competition.”

The used vehicle market, as a result of these factors, is “very, very healthy,” as evidenced in the Manheim Used Vehicle Value Index. There is strong demand and limited supply. As vehicles are returned for trade-ins or repossessions, dealers can sell the on the spot rather than send them to auction. Also, the great recession cut auto sales from 2009-2011, which is impacting current used supply.

“We are expecting the used market to decline just a little bit, but stay strong,” he said.

The U.S.-China trade dispute could also have a significant impact, the two said. The federal deficit is large and increasing despite a good economy, which is worrisome to Eisenberg. He noted global growth is slowing and said rising U.S.-China trade tensions will “weigh on growth,” as will tariff tension with Mexico and Canada.

“That is a lot of problems with the potential to metastasize, but I think they will all be resolved,” he said. “But if you have enough of these six or seven problems go south, we will have problems.”

If the president’s tariffs go forward, warned Chesbrough, it will impact imported vehicles by an average $4,000. The U.S. imports approximately 22% of its vehicles, but if parts are included nearly all manufacturers will be impacted, he added.

“On July 1 the U.S. economy will set a record for the longest recovery in history,” said Eisenberg. “The Fed will not lower rates this year, and might raise rates once. Sit back and enjoy the next eight, nine, 10 months, then a recession might possibly come.”

This story was updated at 5:15 P.M. on May 20, 2019.

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