Tariffs Likely to Cut Into Auto Loans

Tariffs imposed and threatened by President Trump are likely to cost credit unions about 7.5% of the new car loans they had expected to originate this year and next, a CUNA economist said.

In the CUNA Economic Update released Wednesday, senior economist Jordan van Rijn cited research by The Center for Automotive Research that estimates tariffs will raise the price of a new car an average $2,750, cutting new car sales by 1.3 million vehicles per year.

Because about 85% of new car sales are financed, that translates into a loss of 1.1 million loans per year.

For credit unions, it means losing 300,000 originations over the next two years. Not only do car loans account for about a third of their portfolio — a higher percentage than banks — the new car loan segment has been one of the fastest-growing segments of the movement’s portfolio.

CUNA Mutual Group’s Credit Trends Report shows that credit unions held $376.9 billion in car loans as of April 30, up 7.6% from a year earlier.

New car loans grew 8.2% to $149.6 billion in April, while used car loans grew 7.1% to $227.3 billion.

By comparison, non-car loans rose 6.4% to $701.9 billion.

In comments recorded June 6, van Rijn said unemployment is the lowest it’s been in 50 years and consumer confidence is the highest it’s been in nearly 20 years.

“Nonetheless, more and more economists are predicting a recession in the next year or two,” he said.

One of the most worrying signs is the inverted yield curve, he said.

In one of the most widely cited measures, the yield on 10-year Treasury bonds has been running lower than rates for 3-month bonds since May 23. Measured in a three-month rolling average, the yield inverted Tuesday through Thursday.

“Yield curve inversions have preceded each of the last seven recessions, so it’s an important indicator of a possible recession,” he said. “Most economists don’t believe the yield curve causes recessions, but it is an indication that investors are concerned about the future prospects for growth and inflation, and investors are often right.”

CUNA doesn’t believe a recession is “immediately imminent” because the inversions are often one to two years ahead of the start of a recession. Also, the Fed could take actions to lower short-term rates and stimulate the economy, van Rijn said.

On Wednesday, Fed officials signaled that a cut in rates was possible, maybe in July, setting off a stock market rally.

But, regardless of yield curves and Fed actions, van Rijn said credit unions need to watch for fallout from auto tariffs raised or threatened by Trump.

Trump has threatened tariffs of up to 25% on automobile imports and auto parts, citing a law that would allow trade restrictions on the European Union and Japan on the basis of national security.

In addition, Trump has imposed a tariff on Mexico that started at 5% on June 10 and rises 5 points per month to reach 25% by Oct. 1 unless Trump is pleased by whatever action Mexico takes to stem migration.

Automotive parts, cars and trucks are the three largest categories of imports from Mexico.

Higher costs will lead some consumers to buy smaller cars or shift to used cars, raising prices in that market. For some residents of larger cities might find the higher vehicle prices enough of a reason to skip car ownership and depend on Uber, Lyft, bicycles and mass transit.