Autos Expose Economy's Fragility As Credit-Compelled Car Sales Continue To Collapse

Authored by Danielle DiMartino Booth via, 

The revival of the auto industry drove the factory sector out of recession; the flipside doesn’t look promising.

Federal Reserve data released last week on July industrial production offered little more than more of the same. Despite post-election optimism for a rebound in activity on the nation’s factory floors, the data reveal a continued throttling down in the growth rate to just over 2 percent compared with this time last year.

The main drag on activity -- the auto sector -- should come as no surprise to investors. Rather than rising by 0.2 percent over June as projected, manufacturing production contracted by 0.1 percent, marking the third decline in five months. Motor vehicles and parts production fell by 3.6 percent on the month, taking the year-over-year slide to five percent.

Blue Line: IP Manufacturing, Growth Y-o-Y%... Red Line: IP Manufacturing Ex-Motor Vehicles and Parts, Growth Y-o-Y%

Evidence continues to build that a sampling error may be to blame for the surprising strength in June and July car sales. Inventory continues to pile up, suggesting more production cuts are in the offing: As of June, the latest data on hand, auto inventories were up 7.4 percent over last year, leaving manufacturers choking for air. In July, General Motors Co. alone was sitting on 104 days of supply, well above its target of 70 days. Industry-wide, the July/August average of 69 days ties the August 2008 record and sits above the historic average of 56 days of supply.

In all, automakers have 3.9 million units of unsold light vehicles, up 324,600 from last August and the highest on record for the month. For context, July and August tie for the leanest stock levels of the year.

The decline in July sales was already the steepest this year. Fresh loan delinquency data suggest more pain ahead. “Deep subprime” borrowers have been a big boost at the margin, propelling back-to-back record years of sales in 2015 and 2016 as lending standards loosened sufficiently to allow millions with credit scores below 530 to access financing.

Equifax, the consumer credit reporting firm, didn’t hold back in its second-quarter update, saying the performance of recent vintages of deep subprime loans was “awful.” While industry insiders are quick to point out that the overall pace of defaults across all borrowers remains in check, up just marginally over last year, there is growing concern that deep subprime delinquencies are back at 2007 levels. “The bottom line is excess auto inventories are clearly evident and the auto sector is now in recession,” said The Lindsey Group’s Peter Boockvar.

Boockvar’s conclusion raises the question of what’s next for the broader economy. Downside risks are on full display when viewed through the prism of manufacturing net of motor vehicle and parts production. The revival of the auto industry drove the factory sector out of recession; the flipside doesn’t look to be promising. As one economist quipped at the sight of the following chart, “It looks like it’s time to get out the gray crayon.”

IP Manufacturing Net of IP Manufacturing Ex-Motor Vehicles & Parts – Y-o-Y % Change

A deeper question yet is what the implication is for long-term economic growth if credit-compelled sales continue to push the economy in and out of recession, as was the case for home sales in the last cycle and looks to be increasingly the case for the auto sector in the current cycle.

A recent analysis by The Liscio Report, an economic consultancy, dug deeper into the long demise of the private sector’s investment in the economy. Their findings:

At 2.1 percent of GDP, net fixed investment by the private sector is just over half its 1950 -- 2000 average of 3.8 percent. At 1.0 percent of GDP, investment in equipment and software, which has long been identified with long-term productivity growth, is more than a third below its average over the same period of 1.6 percent.

The latest political turmoil suggests a further dampening in animal spirits in c-suites across America. That only underscores the need to switch the focus to infrastructure spending.

Infrastructure investment is supported on both sides of the aisle. No politician likes to run for office with the economy in recession. With the midterm elections just over the horizon, it would seem the imperative to set aside differences at this juncture are that much greater. For the sake of an economic jumpstart, it might be as simple as making America’s highways and byways passable again.


Mazzy JMT Wed, 08/23/2017 - 17:36 Permalink

That's not the point at all.  The point is that new vehicles are overprices, the reason being is because those price increases are credit driven.  Dumb Americans will pay more with access to credit than that would if they could only spend cash they had already scrimped and saved for, and dealers and manufacturers know this.The used market seems to be closer to the real market.

In reply to by JMT

JMT JRobby Wed, 08/23/2017 - 16:19 Permalink

Actually the total 'out the door price' isn't that much less than new.. and these days sticker prices are usually non negotiable (remember car sales were at Record highs in 2016) because sales are still at the near 2016 record...  Like with rental apartments, & homes for sale - it still is vastly a sellers market

In reply to by JRobby

Nunyadambizness Wed, 08/23/2017 - 15:39 Permalink

Oh come on, this can't be right.  Obozo told us for at least 8 years that the economy was booming, and now Trump is doing the same thing talking about the DOW, etc.  The author must be wrong, there is no glut of cars, everything is honkey dory, go back to sleep.

mtndds Wed, 08/23/2017 - 15:41 Permalink

I cant wait to get the Ford F350 diesel crewcab 4x4 with a 10 inch lift and 37 inch wheels at a negative interest for 60 months with a bass fishing boat in tow.

aliens is here Wed, 08/23/2017 - 15:42 Permalink

More car sales for the people living in the hood. No credit check needed just come in and sign your name on the dotted line and drive away in a brand new caddie or BMW.

Falling Down Wed, 08/23/2017 - 15:43 Permalink

Well my friend no longer sells Fords . Threw in the towel about a month ago. I foresee a huge chill coming to the auto industry. Even the GM workers here in Fort Wayne are getting nervous.

Batman11 Wed, 08/23/2017 - 15:50 Permalink

Let's try and run an economy on debt based consumption and speculation.They had the same idea in the 1920s, it eventually tipped over into the debt deflation of the Great Depression., neoclassical economics is back with the same private debt blind spot.The whole thing has been running on the thing it hid, private debt.    

BetterRalph Wed, 08/23/2017 - 16:05 Permalink

Over-regulation left new cars with much to be desired including scheduled and unscheduled maintenance.
Make American Muscle Cars Great Again. Your car should come with a soul and a TOOLBOX.
Make Cars without Computers again. Your car should start after an EMP, yeah the radio's dead.

Stan Smith Wed, 08/23/2017 - 16:13 Permalink

I'd argue most new vehicles are overpriced, in some cases appreciably.    The manufactures and dealers will lard them up with discounts (that they write off) to make the true "price" somewhat more reasonable.   I'd say they are still to high.   If that doesnt work, offer 84 months of financing.   Seriously, I mean 10 years ago how many auto loans were past 48 months?This doesnt even count the flood-to-be of off lease vehicles to be entering the market as ZH here has made well known.  It'll be interesting to see where this goes the next two years.    I see some cheap ass sedans heading our way.

TurtleSoup Wed, 08/23/2017 - 16:33 Permalink

Besides bringing riskier and riskier debtors into the market by easing credit standards, you are also making it possible for anyone and everyone who needs or wants a new car or truck to buy one. When demand is satisfied it is no wonder that customers are no longer lining up outside show rooms to buy. Supply and demand is not a tricky concept. You will only sell so many turkeys at Thanksgiving no matter how much you promote or discount your butterball gobblers. Similarly if I bought a new car last year (and am still paying for it !) I doubt I'll be in the market for another anytime soon. And by lengthening the length of loans, buying a new vehicle once the previous loan is paid off means buying a new car every five, six or seven years rather than every three or four as in the past, furthering damping down new car sales. Got to happen. Just common sense logic.

Bai Suzhen Wed, 08/23/2017 - 18:35 Permalink

The problem with new cars is that they are too high tech.  Nothing is user servicable.  Nothing holds up.  The more fun the car is to drive, the worse it will be.  Turning in a leased '15 GTI in 5 months.  Great car to drive, and practical, too.  In the prior 2.5 years it's been in the shop three times for an A/C problem (took dealer thrice to figure it out).  Drivers side electric window control module failed after two years.  Backup camera only works half the time.  "Park pilot" auto stuff is complete garbage, and too slow to react to do any good.  Nav sometimes thinks I'm in California when I live in Florida (memo to me: got to get the hell out of FLA soon).  God knows what it would cost to fix all this sdtuff without a warranty.  On the other hand, I have a 17 year old Chevy truck that has required about 2K in expenses in all that time.  I'll just keep it and forget anything new after the lease is up.  No way will I ever do a cash for clunker deal as long as it's running.

slyder wood Bai Suzhen Wed, 08/23/2017 - 21:14 Permalink

Yeah, as smart as Germans are supposed to be they can't do electrical worth a shit. Even some of their mecnical design is crap. If that GTI is turbo I'd dump it before 100K just to be safe, They make superb metal though. Had VW cranks with 200k and only needed polishing. Upper engine hit and miss. On motorcycles, knowledgeable riders own FJRs, Concours, ST, etc not BMWs. Drive shaft failures at 50k. Cost to repair is ridiculous.

In reply to by Bai Suzhen

JMT slyder wood Wed, 08/23/2017 - 23:40 Permalink

200K miles?? LOL!!!  The 100,000 mile still applys to cars.. Once a car hits 100,000 miles the cost to maintain & repair becomes absurdly expensive not to mention sensors that cost $700 (each to replace) that lead to check engine light coming on.. The limit for most vehicals is 10 years or 100,000 miles before retiring it in the junkyard

In reply to by slyder wood

Blano Wed, 08/23/2017 - 19:32 Permalink

All I know about infrastructure investment is that I just drove Dallas to Detroit and back this past week, and there was construction all up and down my route, and these guys are working 24/7.

DaBard51 Wed, 08/23/2017 - 20:50 Permalink

I'm seeing unexpected bloomin' fields of pickup-trucks and other vehicles along various highways, hmmmm....   When nine hundred years old you become, look this good you will not.

JMT VW Nerd Wed, 08/23/2017 - 23:37 Permalink

sales of late model & low mile (under 15,000 on the odometer) used cars in every segment are selling quickly. The days of 'negotiating' are over..  It is a 'take it or leave it' attitude -- you know the attitude you get now from cable cos, wireless service providers, landlords, home sellers, real estate agents, and mortgage service providers when you are presented with the long list of closing costs paid by the buyer etc... The attitude now is that since consumer spending is on fire (just take a look a ten year char of retail sales & consumer spending).  Decent used cars (especially popular SUVs especially Acuras and anything BMW) are sold within a day or two usually above sticker price since the 'bidding war' model where most home sales are selling for well above ASKING price and apartments are renting for well above listed rents has now moved to late model & new car sales -- like I said before mostly millenaials are have this almost pathological obsession with spending money think conspicous consumption times ten and mommy & daddy cosigning car loans, student loans  and apartment leases

In reply to by VW Nerd