What The Latest Round of Stimulus Checks Mean for The Automotive Industry

The federal government has passed a third wave of stimulus checks to be released in response to the COVID-19 pandemic, and each recipient receives $1,400. Many of the checks have already been distributed and many more are on the way. This review discusses how the latest round of stimulus checks may impact the automotive industry, highlighting where car prices may go,whether or not inflation could occur and ideas on how you can use your stimulus money to upgrade your car or purchase a new one. 

How the first two stimulus checks affected car prices

When forecasting the possible effect the latest round of stimulus checks could have on the automotive industry, we should, of course, look at how the first two rounds impacted car buying. Used-car prices rose more than 17 percent within a seven-month span in 2020. This is particularly related to a rise in demand from stimulus checks, combined with a decrease in production due to shutdowns of production. 

The shutdowns of production made new cars more scarce, which led many to purchase used cars, driving the price up. The situation is different with the latest round of stimulus checks as auto manufacturers have since increased production significantly, more Americans are back to work and we have begun distribution of the COVID-19 vaccine. 

Some fear overstimulation could lead to inflation 

Of course, as the demand for buying a car increases, dealerships and manufacturers are able to charge more. Subsequently, there is some fear that a huge increase in demand related to the release of the latest stimulus checks could once again inflate the price for new and used cars, which could lead to an increase in the federal funds rate. 

Although, the risk of inflation is not as high as it was in 2020 as the supply level has significantly increased since then with more manufacturers starting to operate at a normal capacity. Nevertheless, the fear of overstimulation that leads to inflation remains the largest counter point and concern that economists have over the way the stimulus checks could impact the automotive industry. 

What could happen if inflation occurs, driving car prices up

If inflation were to occur and car prices rose, then you could see demand decrease as they can simply choose not to buy a car at an unreasonable price, which is the counterpoint to economists who suggest that inflation could result once again from the latest stimulus checks. 

However, if inflation continued, then there would be two options for the federal government to take. The first is they could allow inflation to take off, or they could tighten the monetary policy in an effort to discourage spending, which is typically accomplished by higher interest rates. 

Some experts believe $1,400 stimulus checks is not enough to increase demand

There is concern among some economists that the stimulus payments are not enough to increase the demand within the car industry. For example, automotive industry expert and economist Peter Nagle states that he does not expect the latest round of stimulus checks to notably increase the demand of car buying. 

While he notes that the stimulus may cover a few monthly car payments, it is not enough for individuals to make the more long-term decision of buying a car. Of course, this is just one opinion, and the effects of the stimulus payments on the demand within the automotive industry has yet to be determined. 

More money for a down payment could increase demand

While $1,400 is not enough to purchase a new car, it helps would-be buyers have enough to get through the initial stages of car buying, providing them with a substantive down payment amount. This was largely the case with the two stimulus packages that were released in 2020, so it is reasonable to expect this to occur once again. However, if prices or interest rates were to rise to a much higher level, then consumers would likely decide to spend their stimulus money elsewhere. 

Our prediction: Supply and demand both rise, keeping car prices stable

As mentioned, the price of used cars sky-rocketed in 2020 due to a decrease in supply of new vehicles due to the forced shutdown of production caused by the COVID-19 pandemic and a relatively stable (or increasing) demand rate. 

However, this time should be different as the production of new vehicles has increased substantially and buyers are more hesitant to purchase at the increased price range that we are at currently. Our prediction is that supply and demand both increase, although the rate of supply will likely surpass the rate of demand. We expect the price of used and new cars to remain stable. However, the automotive industry as a whole should remain strong. 

Should you buy a car with your stimulus check?

Let’s be honest. $1,400 is not enough to purchase a reliable used vehicle and using the stimulus check to make a down payment is not a recommended strategy as you are taking on more debt. Instead, we advise that you consider fixing your current vehicle up with your stimulus check, rather than searching for a new vehicle at an abnormally high price. 

You can schedule a tune-up for your car and address any issues with your car that may be a safety concern. This may include switching your tires out for new ones, upgrading your headlights or servicing your brakes. In fact, you may be able to do all three and still have money in your pocket, whereas the $1,400 would only make a small dent when put toward a new car purchase. 

Final thoughts

The stimulus checks should help the automotive industry as a whole. It allows more dealers to stay in business and provides consumers with extra funding to purchase a vehicle they may need. For others, the ability to fix up their current vehicle is a game changer as well. This also benefits mechanics, body shops and car part distributors. Therefore, while further inflation of used car prices is a risk and something to closely monitor, the short-term outlook for both the consumer and businesses within the automotive industry is promising.