US Auto Sales About To Go Over A Cliff Warns Deutsche Bank

Analysts at Deutsche Bank see flashing yellow lights ahead for US auto sales. “Somewhat ominously, today’s market increasingly resembles one we described [in a February 2004 report entitled] ‘A Triple Threat’,” says Deutsche Bank analysts Rod Lache, Mike Levine and Robert Salmon. In a research note dated April 3, they said, “In that report we highlighted the risks to the industry from rising rates, rising negative equity in vehicle loans and used vehicle price deflation. This could lead to deteriorating affordability, delayed trade-in cycles, consumer shifts from new to used, diminishing credit availability and deteriorating mix/pricing.”

What has the analysts so jumpy? Several factors. The Fed is raising interest rates, albeit slowly. Cars sales were down over 1% in March. Unless things improve, the US is now on pace to sell about 1,000,000 fewer cars than last year — 16.6 million instead of 17.6 million last year. Another key concern is that fewer cars are being taken off the road. The number of cars being taken off the road each year has slipped from 13 million a few years ago to an average of 11 million today.

“This has led us to question whether the U.S. is broadly oversupplied, and whether trend demand in the 17 million range is fundamentally supported,” the analysts wrote. “If it is not, the oversupply should be self-correcting — the U.S. market will experience declining used vehicle prices, pressuring new vehicle sales.”

Indeed, that is precisely what is happening. Average used car depreciation is rising, leading to lower prices. The rate was 7.7% in February compared to an average of 3.5% in the first nine months of 2016. Sales of passenger cars continue to fall while sales of light trucks (which includes SUVs) is holding steady at between 10 and 11 million a year.

Deutsche Bank predicts that Ford and General Motors will need to trim production schedules in the months ahead to keep inventories from ballooning out of control. That, of course, spells trouble for American factory workers. Chrysler has all but eliminated passenger cars already as it focuses on making Ram pickup trucks and Jeep SUVs.

The rate of car loan delinquencies is also a concern, especially in the volatile sub-prime lending category. Those of us able to remember all the way back to 2008 (something our political leaders are incapable of doing) may recall that sub-prime lending was one of the main triggers of the meltdown in the US housing market as easy credit caught up with shrinking incomes. Sub-prime lending has now become an important part of the automobile business.

Car makers need to be able to sell the cars they manufacture. Often they have captive lending divisions who are under pressure from above to approve loans to people who really can’t afford them. Some lenders are now offering 7 year loans on more expensive vehicles to keep the monthly payments as low as possible. “Credit performance for both prime and subprime auto loan ABS is expected to continue to deteriorate, although at a moderate pace,” analysts at Bank of America Merrill Lynch said in a report last week.

While consumer confidence numbers surged after the election, consumer spending has been disappointing in most sectors of the economy. People say they are feeling positive but are keeping their wallets in their pockets and their pocketbooks closed. Is America going to be great again or broke again? “We’ll see,” said the Zen master.

Source: Automotive News