I'm amazed that worked, but Fender gear is Good Stuff.
Yes. It converts line-level analog voltage to PWM.
It's probably more a case of high input impedance at the PAM8302.
A guitar pickup has a permanent magnet in a coil with many turns of wire. A steel guitar string moving in the magnet's field creates fluctuations in the field, and those fluctuations induce current in the wire coil.
The PAM83023's input has high input impedance (several megohms). Even the small current from a pickup coil can generate a relatively large voltage across it, which leads to the clipping you've heard. You're basically driving a high-impedance voltage-input device with a low-impedance current-output device.
Traditionally, a pickup's output current goes to a current amplifier (made from bipolar junction transistors), and the output from that gets turned into a line-level voltage signal. Then that goes to a power amp that keeps the voltage the same, but increases the current immensely. Then that current goes to a speaker.
You can convert the current from the pickups into a voltage by connecting a resistor between the PAM8302's inputs.. you'll have to experiment with the values to see what works. The resistor's value will be enough lower than the PAM8302's input impedance that it dominantes the voltage produced by the current. It's a hack, but one that should work in general.
The proper solution would be to run the output from the pickups through a preamp to get a good line-level voltage, then feed that to the PAM8302.