The auto industry’s latest successes are built on a shaky foundation of debt (debt is always a shaky foundation). From Wolf Richter at wolfstreet.com:
It’s already in the works and goes far beyond subprime.
The auto industry is crucial to the US economy and jobs. Auto sales account for 21% of total retail sales so far this year. They’re up 4.5% year-over-year. New Vehicle sales in 2015 hit an all-time record, even as the rest of brick-and-mortar retail was weak.
The industry – including component makers and other suppliers – account for a good part of US manufacturing. Transporting over 17 million new vehicles a year from assembly plants or ports of entry to cities around the country is big business for struggling railroads. Transporting them from rail yards to dealer lots is big business for specialized trucking companies. They also haul millions of used vehicles every year to and from auctions where rental-car and leasing companies dispose of their vehicles. Many of the jobs across the industry pay well.
Auto sales involve services, such as finance and insurance. They’re a significant source of revenues for local and state governments. Wall Street salivates because it gets to extract fees during many stages of the process – particularly in financing these sales and then securitizing the loans.
And all of it has been booming for years!
But if the flow of money slows, the entire growth machine starts grinding down. Pressures are already building up – and far beyond subprime auto loans.
The New York Fed’s Household Debt and Credit Report, released today, shows that total household indebtedness rose 1.1% over the first quarter, to $12.25 trillion, just 3.3% below the peak of the last credit bubble in Q3 2008 that blew up with spectacular fanfare.
But this time the distribution is different: housing debt is lagging behind (due to the presence of institutional and foreign investors), but non-housing debt has jumped far ahead, led by student loans, which more than doubled since the Financial Crisis to $1.26 trillion, and auto loans which soared 29% to an all-time high of $1.07 trillion.
While overall “serious delinquency” rates (90+ days delinquent) improved a bit, they have begun to deteriorate for the $1.07 trillion in auto loans.
At 3.5% of outstanding auto loan balances, serious delinquencies are still way below their peak of 5.3% in Q4 2010 when the employment fiasco was coming to full fruition. But during the prior recovery leading up to Q2 2007, they ran between 2% and 2.5%. So already, consumers are more stressed with their auto loans than they were during the prior recovery. And these are the good times, with interest rates at historic lows!
The higher delinquency rate today compared to the prior recovery shows that the auto boom over the past few years was obtained by pushing auto loans to the max.
Regulators have been publicly fretting about auto loans, including the Office of the Comptroller of the Currency. In its most recent Semiannual Risk Perspective, released last fall, the banking regulator warned:
Underwriting practices and weak loan structures in auto lending are most concerning in banks with high concentrations of auto loans. Strong auto loan growth alone does not pose systemic risk; however, the level of concentrations and rate of growth at individual banks are an increasing focus for OCC. Even as banks have increased capital levels, auto loan portfolios represent greater than 25% of capital at about 15% of banks.
To continue reading: What Will Sink the US Auto Boom?
Reblogged this on The way I see things … and commented:
“The auto industry is crucial to the US economy and jobs. Auto sales account for 21% of total retail sales so far this year. They’re up 4.5% year-over-year. New Vehicle sales in 2015 hit an all-time record, even as the rest of brick-and-mortar retail was weak.
The industry – including component makers and other suppliers – account for a good part of US manufacturing. Transporting over 17 million new vehicles a year from assembly plants or ports of entry to cities around the country is big business for struggling railroads. Transporting them from rail yards to dealer lots is big business for specialized trucking companies. They also haul millions of used vehicles every year to and from auctions where rental-car and leasing companies dispose of their vehicles. Many of the jobs across the industry pay well.”