By Ray Birch
IRVINE, Calif.—If COVID-19 cases do not return to the levels experienced in March and April—and the government does not make any missteps—one economist believes the U.S. economy could be back to functioning at normal levels by the end of the year.
Elliot Eisenberg, chief economist for economic consultancy GraphsandLaughs, emphasized during Origence’s latest Economic and Lending Trends webcast that housing and auto lending will be key drivers of the comeback.
But it’s a comeback that faces no shortage of hurdles. In addition to the threat from COVID-19, other concerns include rising auto loan delinquencies—especially in an older age group—and the government making the right moves with stimulus packages in follow up to those already delivered.
“Unless the coronavirus returns, which is a distinct possibility, we should be out of the woods and beginning our swoosh-shaped recovery—steady, solid improvement over time,” said Eisenberg.
During the webinar, David Adams, VP of lender/client experience at Origence, pointed out CU Direct numbers show auto lending is gaining strength after a sharp drop-off as much of the country was under stay-at-home orders. As CUToday.info reported, new auto sales are expected to finish 2020 below 13 million units, more than three-million short of projections at the beginning of the year.
Starting to See a Comeback
“We are starting to see a comeback,” said Adams. “This is across all our channels and all of our systems across the country. Applications are increasing, and have actually surpassed this recent period from last year.”
The slow recovery in volume isn’t just limited to auto sales, with Adams saying the company is seeing improvements across all consumer loan types.
“We think things are very much on the rebound,” he said.
As CUToday.info reported here, PSCU reported it has seen the sixth consecutive week of improvement in member spending on their plastic cards
The Catch-Up Months
But auto sales and the resulting loans remain the keystone, and Eisenberg said he also sees auto lending beginning to make a U-turn.
“March was bad and April was worse, and we will get the data soon on May,” said Eisenberg. “Expectations are that things here are really turning around. I would expect between now and the end of the year, auto sales will pick up and by November and December we will be on par with where we were last year.”
Eisenberg termed late June through October “catch-up” months for auto sales, as the level of buying steadily picks up.
Yet there is another catch-up issue and Eisenberg said it’s a big concern: rising auto loan delinquencies and defaults. He noted the trend began before the pandemic, adding he believes the captive finance companies are the ones driving up those numbers.
Elliot Eisenberg
Pointing to Federal Reserve data, Eisenberg said he was not surprised the majority of the defaults are among younger consumers, ages 18-25.
“But what is most interesting about this data is the delinquencies and defaults are rising the fastest among 40-49 year-olds,” said Eisenberg. “Middle-age people are defaulting, and I am not sure what that says. Is it job losses?”
The Housing Outlook
Turning to housing, Eisenberg has an even more optimistic outlook.
“The end of May and early April was bad—that was a very bad period,” said Eisenberg, referring to year-over-year housing sales. “First mortgage applications, not refinances, were down 35%, but now they are up 90% year over year.”
Demand for housing has remained strong, but the real issue remains housing supply, he said.
“People have not wanted to show their homes,” Eisenberg said. “They are afraid of people coming into their homes, touching things and getting the coronavirus.”
But now, as the economy opens up again, that situation is reversing, suggested Eisenberg.
Eisenberg reminded that as the country headed into its self-imposed recession, the U.S. was experiencing one of the best periods for new home construction in the last 12 years.
“We are now seeing a tremendous improvement in first mortgages,” Eisenberg said. “In a month or two, existing sales will be good.”
Eisenberg encouraged credit union mortgage lenders to look at the period from mid-March through much of June as “one and done. Housing will be, like the auto industry, a pretty good sector of the economy. The housing market should have a decent year.”
‘Staggeringly bad Number’
Gross domestic product, predicted Eisenberg, will decline by 35%-40% in Q2.
“A staggeringly bad number. But the country will begin to improve…May/June will be better, and then things will really get better as long as the government does not do anything stupid,” he said.
Eisenberg warned against any rate increases by the Federal Reserve–Fed Chairman Jerome Powell has indicated rates will remain near zero for the foreseeable future--and emphasized he believes a CARES Act II and a HEROES Act II are “musts.”
What is odd about this recession, stated Eisenberg, is the service industry—such as restaurants—typically slows the rate of GDP decline during a recession, which is normally driven by a downturn in manufacturing.
“But now we have services driving us into recession,” he said. “During the Great Recession manufacturing was down, but this time so is services.”