Economists inside and outside the credit union industry warn that the Fed’s actions will take their toll in the coming months.
New cars sold in March at a much faster pace than Cox Automotive analysts expected last week, but its chief economist said the Fed’s rate hike may slow auto sales and cause a recession is more likely.
New cars and light trucks were sold at a seasonally adjusted annual rate (SAAR) of 15.9 million in April, up 11.4 percent, U.S. Bureau of Economic Analysis data released Wednesday showed more than the previous year and 7.2% more than March.
On April 25, Cox Automotive had estimated that new cars would be sold at 15.1 million SAARs in April, up 2% from March’s 14.8 million and up 14% from March 2022 , “a big gain over last year’s limited supply level of 14.3 million.”.
On Wednesday morning, Cox Automotive revised its statement to say sales beat its estimate because they were “fueled by higher inventory levels and a healthy dose of fleet deliveries.” Honda, Hyundai, Kia and Subaru had big gains.
“With inventory at the highest level in nearly two years and transaction prices trending downward in the first quarter, US new vehicle sales continue to surprisingly rise,” the press release said .
NAFCU economist Noah Yosif said the increase in sales “indicates pent-up demand in the industry despite rising interest rates and deteriorating economic conditions.”
In comments posted after the Fed’s 2:00 p.m. Wednesday announcement of its 25 basis point rate hike, Cox Automotive Chief Economist Jonathan Smoke said the Fed is likely to Fed action will worsen the market for new and used car sales in the coming months.
As the Fed raised rates from zero to 5% in 14 months, Smoke said interest rate-sensitive sectors such as housing and the used car market slowed and three banks failed in the last two months
“The Fed appears willing to accept a recession and what is likely to be at least 4 million jobs lost as a result in order to reduce inflation to a 2% target,” he said.
CUNA Chief Economist Mike Schenk echoed that comment, saying the Fed decided to raise rates for the 10th time since March 2022, even though most indicators showed inflation regressed over the past nine months.
While inflation is still above the Fed’s 2 percent target, Schenk said the gap would likely have closed without the latest cut. Inflation was already likely to fall due to a weakening labor market, tightening of credit as a result of recent bank failures and the typically long lag between Fed rate hikes and their aftermath.
“Consumers are likely to feel the pinch of these changes more obviously in the coming months,” Schenk said.
Smoke said there are problems, despite some recent numbers looking good. For example, new car sales so far this year have been stronger than expected and appear to be gaining momentum.
“However, don’t interpret the performance so far as an indication that the new vehicle market is immune to higher rates and the slowing economy,” he said.
While the supply of new cars is up 70% from a year ago, Smoke said borrowing costs have also increased. New car rates in April were 8.8%, slightly down from a peak of nearly 9% in March, but up 3 percentage points from April 2022. A portion of this pain is compensated by the increased incentives of the manufacturers.
Smoke said the biggest pain is in the used car market, where loan rates were 13.5% in April, down from a peak of 14% in March, but up 3.5 points than the previous year.
Yosif, the NAFCU economist, said affordability remains the predominant hurdle for consumers with lower incomes or weaker credit.
“Against the backdrop of tightening credit standards and fewer lenders, credit unions have played an outsized role in supporting this market segment and the overall balance of supply and demand,” said Yosif .
Experian has shown that credit unions won larger shares of new and used car loans last year.
First-quarter results for the nation’s 10 largest credit unions show that trend could continue. The Top 10, which accounted for about 12 percent of credit union auto loans in December, had $273.9 billion in new and used car loans as of March 31, up 18.5 percent from previous year and 2.1% more than on December 31. Gains were slightly stronger for new car loans than for used car loans.
Smoke said evidence is mounting that rising rates are contributing to declining sales in the used market, where rates are more reflective of financial market conditions.
“The Fed acknowledged that credit conditions have tightened in recent months. Still, their unanimous decision indicates they remain more concerned about inflation than the fragility of the financial system or the US economy in general,” he said.
Smoke said the nation is “more likely than not” to fall into recession in the next 18 months.
“The Fed’s actions add to this risk as higher rates expose more challenges to the banking system and inevitably lead to more credit constraints for businesses and consumers,” he said. “This summer could be brutal in its impact on consumer confidence and credit conditions, and that doesn’t bode well for retail vehicle demand.”
