08.05.2017

Car sales down (by W. Snyder)

400One key indicator of how a consumer-based economy is performing is car sales which make up about 20% of all US consumer spending. New light vehicle sales fell 4.7% in April 2017, the fourth month in a row. Inventories are piling up and are now over 70 days. Car makers are planning on a longer than usual summer shutdown.

Used car prices have fallen because of the glut of new cars that were sold in 2016, 17.5 million, which was aided and abetted by discounts and generous credit terms. This becomes a serious problem for lenders when a leased car`s used value is less than what was forecast when the leasing contract was made.  They suffer losses.

Lenders have become more selective as the percentage of bad car loans increases along with rises in interest rates. This puts more pressure on automakers that are already suffering from sliding US sales and swelling inventories. See above.

Banks have bundled car loans up, including sub-prime loans, securitized them and then passed them off to investors that were desperate to find yield wherever they could. These bonds have thus become extremely risky investments as the rate of sub-prime car loan defaults increases. Big banks have now decided to back off from backing car loans, which means that credit available for car loans is going to become tighter with consequences for new car sales, which will include leasing.

The amount of owned and securitized car loan debt outstanding is about US$ 1.12 trillion, which is a lot just for cars. What is worrying is that over 30% of auto-loan securitizations that are in the subprime category are deep subprime, according to Morgan Stanley.  The deep subprime category includes borrowers who practically do not pay their bills and whose credit ratings are consequently extremely low. Dealers eager to chalk up sales will sell to people with no credit rating if financing can be found.

The systemic risk of auto loan securitization is minor as the amount of such loans is about 97 billion as opposed to the 7 trillion dollars of securitized mortgages in 2007 out of a total of 10 trillion. Even so, the impact of lower car sales due to tightening credit and higher interest rates will have a severe impact on the US consumer economy. It is unlikely that the economy is going to grow its way out of excessive debt. In this context the Trump administration`s proposed tax cuts are not feasible as they would entail less income for the Treasury. The lower prices for used cars will be welcomed by people working for minimum wages. Good for them.

Walter Snyder   
info@swissfinancialconsulting.ch

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