As clouds gather over the formerly surging auto sector, consider steering away.


Americans love their automobiles. As a large capital expenditure, it is an important economic variable for the economy, representing approximately 3% of GDP, around 20% of retail sales, 10% of manufacturing output, and over 7% of manufacturing employment. The trends in autos have made a strong recovery from recession lows but have recently begun to weaken. A slowdown is unfolding in auto sales and in production which are headwinds for the economy. The charts below with our comments depict the current fundamentals.


The 2008 recession had a pronounced impact on vehicle sales as the numbers were cut in half from 18.5 million units sold in July 2005 to 9.3 million units in April 2009. The auto industry enjoyed a sharp snap back of 95% to a level of 18.1 million units in November 2015. From there, trends went sideways and more recently, there has been an 8% decline to a run-rate of 16.6 million vehicles currently. Further sales declines and production cuts are estimated for the remainder of 2017.

After the economy bottomed in mid-2009, the stars were aligned for a meaningful rebound in the auto sector. A combination of an improving economy, low interest rates, the average age of passenger cars, low gas prices, and attractive rates all added to the mix.

Lenders became competitive in their pursuit of new auto loan customers as some of the Dodd-Frank regulations made other lending areas more difficult (think mortgages). Consequently, auto loans grew very quickly and now total close to $1.2 trillion, which is 13% above pre-recession levels. To attract more business, lenders dropped their rates and extended the duration of the loans out to an average of 69 months (some have now extended as long as 84 months). Even technology had an impact on the sector as devices could be placed in cars to disable the vehicle if borrowers fell behind in payments. That element gave lenders more confidence to broaden their customer base as they felt that the overall risk was reduced. As a result, loan totals ballooned and now exceed total credit card loans.


As automotive companies went flat out to meet consumer demand and as lenders were eager to meet that demand, excesses have begun to creep in. Sales have begun to slow and inventories have begun to pile up, which in turn, has led to higher delinquencies and ultimately the prospect of higher loan losses. These trends have led the banks to retreat from the market somewhat and tighten their auto loan standards, putting further pressure on sales.


The aggressive stance by lenders in the past few years has come to a halt as the fundamentals have frayed. As mentioned, inventories have risen. Despite record sales in 2016, the number of vehicles in inventory has reached 3.9 million, which amounts to a 66-day supply at year-end. The inventory has swelled to around 74 days’ supply which is the highest level since 2009. The inventory would last 2.23 months at the year-end pace of sales according to the Census Bureau. That level is not as high as it reached in the depth of the recession but, nonetheless, it is very elevated. Of course, the car companies would like to reduce inventories so they are now offering larger and larger incentives to move units. GM’s incentive spending is currently 11.7% of their transaction prices versus 10.3% a year ago. GM has reported an inventory-to-sales ratio of 100 days, up from 71 days as recently as last April.

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