U.S. consumers sought less credit in 2020, and lenders were less likely to extend it, the New York Federal Reserve said this week to the surprise of no one. The Fed's latest credit access survey found that consumer appetite for credit cards and auto loans waned as the pandemic spread, closed down most of the country at various intervals and sent millions of Americans to the unemployment line.
The share of households confident in their ability to scrape together $2,000 in case of an emergency fell to the lowest figure ever tracked in the study — 65.6 percent. The percentage of consumers applying for auto loans also dropped, by 3.2 percentage points, between February and October to 11.6 percent, another low for the N.Y. Fed survey.
There's no shame in admitting the year was terrible. Dealerships faced the pandemic with resiliency and innovation, turning to digital tools, reorganizing staffs and changing hours and responsibilities. The industry regrouped to continue selling and servicing cars enough to generate robust profits under trying conditions.
The remarkable recovery in the vehicle market during the pandemic somewhat obscures the credit tightening observed by experts such as Cox Automotive Chief Economist Jonathan Smoke. Consumers with better than average credit drove the recovery at retailers this year, he said, as they qualified for attractive loan terms and low interest rates dangled by automakers in the spring and summer.
A second round of government stimulus is on the way, further assisting workers whose jobs translated seamlessly to a digital environment. For those that remain underemployed or financially insecure, $600 checks fall short of any meaningful relief.
As we close out a year that also saw wildfires ravage the West, a drawn-out presidential election and the shattering of work-life balance, good news hovers on the horizon: vaccines, improving credit conditions for consumers, and a stronger, wiser and more capable retail industry.
The rollout of effective vaccines has already begun in the U.S. and will likely become widespread in the coming months. Cox Automotive says conditions have improved in the last few months, according to credit bureau data as well as proprietary information from Dealertrack dealership management systems.
Still, 2021 is likely to be a mixed bag. Negative trends will likely carry over, including record-low subprime participation in the auto market and financial insecurity for millions of Americans. Household credit use and quality will remain a concern for retailers in 2021, as will fraud risks. The new year, unfortunately, may well be plagued by many of the same problems that drove down consumer confidence and dried up dealership traffic and inventory.
Vehicle prices are likely to remain high, and if credit indeed remains constricted, Smoke believes affordability will be a defining characteristic of the new-vehicle market.