Early indications from May reporting show a somewhat surprising recovery in auto sales. A number of industry watchers including Edmunds, Cox Automotive, and Barclays have projected robust growth of between 3-4% for the month. The official Seasonally Adjusted Annualized Rate (SAAR) for U.S. car and light truck sales came in at 16.9M, slightly higher than expectations. While results for individual carmakers were mixed, the overall market for vehicles experienced positive demand.
Turning the corner?
The consensus going into 2018 was for a continuation of the pullback seen in the market over the past year and a half. Back then, we warned of a potential retreat from the boom years which began as the country emerged from the 2008 financial crisis. Sales fell 2 percent in 2017 after hitting a record high in 2016 and were expected to drop further in 2018 despite a solid economy. Early numbers from this winter and spring did nothing to contradict prognostications but that seems to have changed somewhat recently.
What to Look For
It remains to be seen whether the recent activity is a blip in an extended down cycle or a leading indicator of a recovery. Here are the factors we are tracking closely.
- Continued deterioration in subprime lending: Buoyed by inexpensive capital and sophisticated underwriting, finance companies aggressively went into the subprime space coming out of the recession. However, underperforming portfolios and an acceleration in defaults is causing many lenders to slash outlook and look for opportunities in higher credit tiers.
- Consumer confidence: Many market analysts are attributing positive sales growth to heightened consumer confidence. However, after a nearly decade long recovery, it is still unclear whether consumer confidence is serving as lagging rather than leading economic indicator. Additionally, increased protectionism has the potential to adversely affect global supply and demand for vehicles.
- Regulatory environment: As expected, the new administration and CFPB has taken a more business friendly approach to regulation and enforcement. As always, a stable compliance and regulatory regime is subject to political realities. Nonetheless, consumer advocates remain vigilant against abusive practices by lenders, dealers, and automakers.
- Elevated gas prices: Gas prices have begun to stabilize nationwide after months of acceleration. Research shows a direct link between prices at the pump and consumer demand for new and replacement vehicles.
- Increased interest rates: Interest rates continue to climb, driving up borrowing costs for consumers. According to Experian, the average monthly loan payment for a new vehicle hit an all-time high of $523. While the impact will be most felt by those with poor credit, all consumers should expect higher financing costs.
Overall, good news is welcome in the current environment. Our own internal metrics and measures also point to reasons for optimism. The vast majority of our conversations with auto lenders of various shapes, sizes, and business models continues to center around profitable growth and competitive advantage. In an uncertain environment, a robust data and analytics capability will be the key to making sound, objective business decisions.