October 23, 2020

Additional stimulus needed to endure coronavirus-induced downturn

Unprecedented times brought on by the coronavirus pandemic called for unprecedented support. As the positive impacts of the stimulus fade, the automotive finance industry — among others — is calling for another round.

The swift actions taken at the onset of the pandemic through the passage of the CARES Act were impactful, if short-lived, in terms of the ongoing crisis. After significant government-facilitated stimulus in March and April, incomes rose for U.S. households even while unemployment levels peaked. Consumers had more money in their pockets; deposits and savings accounts at commercial banks surged $1.6 trillion from the end of February to mid-July, according to Cox Automotive.

Because of the extra cash and government unemployment benefits, auto loan performance has been positive. But without more assistance, auto lenders are concerned about the long-term impacts the virus will have on customers’ ability to repay their auto loans.

Jonathan Smoke, chief economist for Cox, said during a virtual conference Tuesday that incomes fell and spending growth slowed in August as the stimulus faded.

“The economy is no longer supported like it had been,” Smoke said. “Additional stimulus is needed, but so far Congress has not been able to get its proverbial act together.”

Jamie Dimon, CEO of JPMorgan Chase, said on an investor call Tuesday a new round of stimulus would mitigate future strain on banking customers.

“Policy will matter and will skew the odds of having a better outcome. The Fed is doing what it can to keep markets open, but the policy on the fiscal side is just some kind of continuation of unemployment insurance and PPP,” Dimon said. “There are a lot of people who are under a lot of stress and strain who won’t be able to survive another year of complete closedown.”

In the meantime, Chase and Wells Fargo are keeping reserves at higher-than-normal levels in case large swaths of their consumer loans go south. Though credit metrics are strong, particularly on newly originated auto accounts, uncertainty remains.

Without additional stimulus, the positive credit metrics seen amid the pandemic protections period could end. And without more clarity from Congress, major auto lenders will continue to brace for the worst-case scenario.