by Michael Lombardi, MBA
All of a sudden, auto sales are declining…
Auto sales in the U.S. economy declined to an annual rate of 15.4 million units in December. In November, this number stood at 16.41 million units—a decline of more than six percent. (Source: Motor Intelligence, January 3, 2014.) Analysts were caught off guard by the decline in December auto sales; they were expecting an increase!
I see the decline in auto sales as being directly related to rising interest rates. And it’s not going to get any better. For years now (since the Credit Crisis), auto sales have been increasing due to low interest rates. It’s very similar to what happened to the housing market prior to 2007. More and more people went on a house-buying spree when the mortgage rates were at record lows. When mortgage rates started to increase in 2007, the already-inflated housing market got hit hard. The same thing is happening to auto sales now.
Interest rates are rising again. Look at the chart below of the bellwether 10-year U.S. Treasury. Since November, the yield on the 10-year U.S. Treasury has gone up roughly 20%. The higher interest rates go, the weaker auto sales will get. (And we can already see the impact on the auto stocks. The stocks of America’s major car makers are off five percent from their 2013 peak, but key stock indices are near their peaks.)
Chart courtesy of www.StockCharts.com
Rising interest rates will have the biggest impact on auto loans given to subprime borrowers (those who have a lower credit standing). Readers should note that the delinquency rates on auto loans have been continuously increasing since the second quarter of 2012. TransUnion, a credit information company, expects delinquency rates on auto loans to continue rising right through to the end of 2014. (Source: TransUnion, December 17, 2013.)
I’m just not that bullish on the economy for 2014. Soft auto sales are just one factor to look at. But when we have a stock market that is topping out, a housing rebound starting to get sluggish in certain key markets (again, because of higher interest rates), and corporate earnings growth under pressure, I don’t see consumer confidence improving in 2014 to the point that it will positively impact consumer spending. In fact, I see the opposite: I see a pullback in consumer spending coming in 2014.
Disclosure: No positions