by Umar Farooq
It’s a good time to buy a care as auto dealers are offering the biggest discounts since the Great Recession. Auto sector in the U.S. has experienced record sales in recent months. But there are early signs that the party could soon be over for the auto industry.
“Broadly speaking, autos make up about 3% of the country’s gross domestic product, but account for a slightly larger share of inflation metrics like the Consumer Price Index and the Fed’s preferred measure of prices, known as personal consumption expenditures. This may sound small, but it’s enough for a steep decline in the auto sector to shave a few tenths from both GDP and the inflation metrics, limiting Trump’s ability to reach the rapid economic growth he has promised and hampering the Federal Reserve’s target for 2% inflation.” Annalyn Kurtz
Bob Carter, president of Toyota’s U.S. sales unit, called the industry “over the top” and noted that Toyota’s discounts are “higher than we’ve ever experienced.” Toyota certainly isn’t alone. Dealers are having to offer consumers the biggest discounts since the Great Recession to move new cars off the lots. These discounts averaged about $3,900 per vehicle in the first three months of 2017, or about 10.5% of the average manufacturer’s suggested retail price (MSRP) for a new vehicle, notes J.D. Power forecaster Thomas King.
Michelle Meyer, an economist at Bank of America Merrill Lynch, looked at the auto sales number as well, and says there’s a number of worrying factors.
The first is simply that car sales dove in March — falling to a two-year low of a 16.62 million seasonally adjusted annual rate, according to Autodata figures.
In addition, there are worries about “bloated” inventories, which have driven down used-car prices, as well signs of stress in the auto-financing market.
On the other hand subprime auto loans are also threatening a new crisis in the making. “People are increasingly missing payments within the first six months of taking out their auto loans, which is a telltale sign that loans are being made that are clearly unaffordable,” Chris Kukla, senior vice president of the nonpartisan Center for Responsible Lending, told Salon.
“The pieces of the puzzle are coming together to point to weakness ahead for the auto sector, but there is the lingering question of how quickly the story will evolve,” Bank of America Merrill Lynch economists Michelle Meyer and Alexander Lin wrote in a recent note to clients, aptly titled: “Are we heading into a car crash?” “So far, the slowdown in the pace of auto sales is manageable for the economy,” they concluded.
by Umar Farooq