Early reports show that auto sales will fall below expectations in July. Ford CEO Mark Fields noted that the industry is starting to face headwinds. He noted that he expects sales to continue to decline through 2017. The slowdown in sales isn’t surprising considering the US GDP hasn’t increased as much as hoped. The economy only inched forward by 1.2% during the second quarter. There isn’t only bad news though.
According to KBB the average sale price of a new vehicle is now just north of $34k. That is a lot of money for a new vehicle and that price is nearly twenty percent higher than when sales started to pick up after the great recession. Simply put automakers are raking in record revenue for each vehicle they sell. So you have a dual sided story. On one hand auto sales are starting to plateau and the expectation is they will start to decline. But on the other hand consumers are spending more on each new vehicle purchase than they ever have before. I do have some concerns.
First off, I wrote a blog post a while back that noted consumer debt for automotive purchases is at an all time high. This, along with the possibility of further declines in sales puts consumers, banks and automakers in a vulnerable position. The consumers who could probably “afford” the extra debt already have it. But with sales declining, auto makers will be more wiling to increase incentives and decrease credit standards. The banks will probably also lower their standards for auto loans in hopes to keep revenues steady. The banks have already been squeezed by eight years of near zero interest rates. They have to find someone to loan money to in order to make a profit. This could set up a perfect storm that bring several industries crashing down. You can’t have all three parties at the table overextended and hope that something good will come of it.
The next concern is for the economy as a whole. Profits across the board are declining. They are not tanking but they are slowly declining quarter after quarter. Also, GDP numbers haven’t been rising like expected and we are now seeing manufacturing in general declining along with auto sales. In my opinion none of these numbers are necessarily a reasons to panic but it definitely makes you wonder why the stock market continues to hover at or near all time highs.
Lastly, my biggest concern is the Fed. I believe they have missed their opportunity to raise interest rates. Rates should have gone up two or three years ago. The economic explosion that quantitative easing was supposed to unleash on our economy never happened. Now the Fed is sitting there watching a declining economy with no more tricks in their bag. I don’t believe the Fed had any tricks in their bag to begin with but my biggest fear is they will push rates into negative territory if the economy continues to slide. If this happens banks all over the world will get crushed. Right now US treasuries are one of the only governmental bonds that still have a positive interest rate. If the Fed takes US rates into negative territory the only place banks could turn to is emerging market bonds. By doing so they would be taking on significantly more risk. I’ve said it before and I will say it again, economic activity in the last half of 2016 is something we will all need to keep a close eye on.