Tuesday, April 11, 2017

Banks May Be Behind The Mysterious Drop-Off In Car Sales

By Patti Domm
CNBC
April 11, 2017

-- Banks tightening lending standards as delinquencies pick up.
-- March vehicle sales fell to an annualized pace of just 16.5 million, below expectations of 17.3 million and the weakest rate since February 2015.
-- Economists watching auto sales carefully to see if it's a sign of broader consumer weakness.

Lenders may have helped put the brakes on car sales last month.

March's sudden slowdown in vehicle sales surprised economists, who are now watching to see if the trend continues and whether it is also foreshadowing a weakening of the consumer. Auto sales are an important economic barometer, and while not a big part of the economy, the industry can create a much larger ripple effect.

"If the next few months reveals a further decline in auto sales, we need to pay attention to that because it will feed back to the economy directly. The bigger risk is that it's a sign of broad-based weakness of the consumer. At this point, we can't make that case," said Michelle Meyer, head of U.S. economics at Bank of America Merrill Lynch.

Auto loan delinquencies have been on the rise in all categories, and lenders, after an extended period of low rates and easy money, have been tightening loan standards. The trend picked up in the second half of last year, but accelerated in the first quarter of this year.

Auto delinquencies, percent of balance of auto loans from the NY Fed's credit panel.



Some of the focus has been on subprime loans, but Meyer said all loan types have seen delinquencies. "It's possible the fact the delinquencies are picking up, it's leading to a tightening of lending standards, which is feeding back to the demand," she said, noting that the Federal Reserve's senior loan officer survey has been highlighting the trend.

She said, for now, the tightening appears to be a normal reaction, not a more dire concern.

Net percent of banks tightening standards for auto loans. 11.7 percent Q1, 2017



March vehicle sales fell to an annualized pace of just 16.5 million, below expectations of 17.3 million and the weakest rate since February 2015. Economists say they are watching to see if sales have peaked, after the annualized selling pace touched 18 million late last year.

"It's possible sales just increased much faster than broader consumer spending. That was partly because of finance, aging of stock and low gas prices," she said.

For now, economists are looking at other factors too.

Meyer said Bank of America Merrill Lynch analysts are concerned about bloated inventories, especially for used cars, a factor already weighing on prices.

BofA's auto analyst John Murphy expects auto sales to total 17.9 million annualized selling pace this year, and that means autos could provide a 0.1 percent point bump to growth. Murphy has said there are downside risks to his forecast but he has not changed it.

Meyer said if sales fall to a lower level, however, it could be a small hit to GDP. Based on worst case scenario of 15 million, GDP would be hit by 0.4 points and there would also be an impact on auto parts, trade and transportation. A big drop in sales would be the result of a downturn in consumer sentiment which would also ripple through other parts of the economy.

Goldman Sachs economists also studied the slowdown in vehicle sales, which they see as the beginning of a bigger trend. The economists say they expect the annualized selling pace could ultimately settle at 15 million, based on a trend of declining demand and other factors.

The economists point to a drop in licensed drivers, particularly among younger drivers, plus a decline in the number of vehicles per driver. The number of vehicles per driver fell to under 1.2 from about 1.25 in the early 2000s, according to Goldman.

"Our central estimate depends on a range of assumptions, including an annual 0.1-0.2pp decline in the adult population driver share and a flat number of autos per driver," they wrote.

Another trend is also emerging that could dampen car sales to even lower than 15 million. "Longer term, the risks to these estimates are probably on the downside, especially if the 'sharing economy' — exemplified by companies such as Zipcar, Uber, Lyft and Via — makes deeper inroads into the transportation sector," the economists wrote.

The Goldman economists said the impact on GDP would be small. Consumer spending on vehicles and parts is about 2.6 percent of GDP, but only half of that is from domestically produced vehicles, while the rest is imports or used vehicles. If the decline occurs over two to three years, the drag on annualized GDP growth would be about 0.05 to 0.1 percentage points per year, they added.

Meyer said the pace of auto sales is manageable for the economy, and the sector could go from a slight positive for growth to a neutral or slight negative. The inventory to sales ratio has been rising, and if sales slide further, inventories will rise, pressuring prices and resulting in production cutbacks.

BofA says autos make up 3 percent of U.S. GDP, much smaller than the 4.2 percent back in the late 1970s. When looking just at consumers, autos are 3.7 percent of personal consumption expenditures, a measure of overall consumer spending. Auto prices also play a role in the consumer price index, at 6.5 percent of the headline CPI.

"Historically you get very big swings in the inventories. Even though it's a small share of the economy, it matters a lot in terms of the swings can have a lot of impact," Meyer said.

"There's risk of greater disruptions to the economy through the indirect channels. Potentially it could impact credit creation if we are seeing further increases in delinquency rates. That could weigh more broadly on the flow of credit," said Meyer.


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