Vehicle Data Shows 'Revving' Economy

Summary

• Banks increased vehicle lending during the pandemic.
• Vehicle sales are within 10% of pre-pandemic levels.
• Average loan amount increased during pandemic.

Photo by gehringj/E+ via Getty Images

In April 2020, the annual projection for car sales fell to their lowest level over the last 40 years. Despite this fall in annual vehicle sales pace, the outstanding balance of motor vehicle loans never declined, in fact, it increased by $38.4 billion from Q4-2019 to Q4-2020. Since 1943, only two recessions have seen no decline in the outstanding balance of motor vehicle loans: the current recession and the dot-com bubble. For historical context, the dot-com bubble was as short as a recession can be, while the current recession is likely (at least from a data perspective) to be one of the longest recessions in the post-WWII era.

Fast forward to today, motor vehicle sales are signaling a re-establishment of their pre-COVID sales pace and the outstanding balance of motor vehicle loans is climbing. Surprisingly, the previous 138 words are not the end of the analysis. I have never been accused of being short-winded. If we examine the deferred consumption in the automobile market that occurred in 2020 and its alignment with a lack of compression in the outstanding balance of motor vehicle loans, there is an important economic concoction that investors in the motor vehicle market should be aware of.

Let’s jump in.

First, I want to clarify the metrics. The outstanding balance of motor vehicle loans is straightforward; it is just the total dollar amount of auto loans sitting on banks’ balance sheets, and this is released quarterly. Surprisingly, the Federal Reserve does not adjust this number to account for inflation, but given the relatively short duration of auto loans we can still compare intra-recession changes in balances; I had an econ professor when I was an undergrad who always taught us the good economic analysis is done on the margins, and we can still exam the change in the outstanding balance of motor vehicle loans on the margin without adjusting for inflation as long as we stay within recessionary windows. The second metric we are using, motor vehicle sales in units sold, is calculated monthly in a really interesting manner. In a similar way to GDP, the Federal Reserve looks are what the projected annual pace for car sales are, based on the sales within a quarter. So the numbers in the graphs are not the sales at a given point in time, but rather the sales that would occur in a year at that pace.

Now that we have the table set, let’s eat.

Given the most recent data on motor vehicle sales, released by the Federal Reserve on March 26^th, US consumers are still not back in full force buying vehicles. While this has greatly improved from the floor in April 2020 of an annual rate of 9.06 million units to the current annual rate of 16.12 million units in February, we are still well below the average annual rate of 17.69 seen from 2015 to the beginning of the current recession. Vehicle sales still have to grow 9% to recover to pre-COVID level.

Sources: FRED Database

While this metric alone may make an investor bearish on the auto stocks, there are far more than sale rates that we need to look at. From the lowest vehicle sale rate seen in the 2008 recession, annual rate of 9.22 million units in February of 2009, it took 43 months to get to 9% below the pre-recession number; in the current recession, it took only 10 months.

As I covered in my last article, Large Banks Have Been Building Up Toxic Assets, But There Is Light, the banking sector has built up a considerable amount of toxic assets since the start of the pandemic, but delayed consumption and Federal Reserve activity has pushed deposits and liquidity to record highs. The spillover effect of high deposits and liquidity in banks is the continued ability to support vehicle purchases. This is why we saw the outstanding balance of motor vehicle loans climb to $1.225 trillion, and while these balanced growth factors may have flattened slightly compared to the pre-recession trend line, it is nominal and still positive.

Sources: FRED Database

As mentioned in the introduction, banks loaned a net increase of $38 billion in vehicle loans since the beginning of the recession. This increase would be a good sign even without context, but when we consider that this increase requires the replacement of loans that matured in this timeframe, this increase looks even more impressive. An additional effect of the banking industry having high liquidity and high deposits is that, despite the economic uncertainty of the last year (that feels like an understatement and a half), the Federal Reserve reports that both the 60-month and 48-month interest rate on new vehicles loans fell when compare to pre-pandemic rates. To throw two more economic data points in this smorgasbord, the average amount financed when purchasing a new car increased but, except for one outlier month, the average months on a vehicle loan has stayed very much in line with pre-pandemic terms.

If we combine the rebound in vehicle sales with the fact the outstanding balance of motor vehicle loans increased during the recession, we begin to uncover a more bullish view on vehicle sales. There appears to be no decline in the desire to purchase and finance vehicles, but rather the delayed consumption we saw during 2020 was the product of consumers being unable to physically buy a vehicle. Unlike many goods and services today, vehicle purchases are still done primarily in person (yes, some really cool companies are making purely online car shopping possible, but they are still a small portion of this huge market). Consumers will research and browse stock online, but they still want to test drive a vehicle before purchase. Sometimes the best analysis is just common sense; what would you think if someone bought a car without ever test driving it? Probably, not immediately positive it was the most desirable way to spend several thousand dollars. This deferred consumption can be better characterized as forced deferred consumption, with consumers being barred from the marketplace in various social and legal ways. It is also important to consider that large firms who maintain large fleets that require considerable vehicle purchases every quarter delayed capital acquisition in the beginning of the pandemic; these firms appear to have resumed their vehicle purchases.

Now that restrictions are being lifted and consumers can more freely engage in the market again, this is great news for a market segment whose stock prices have already largely recovered from the early 2020 drop.

On a closing note, I have always been a big fan of vehicle sales as a measure of economic health. I am very Austrian in my view of economics. Hayek’s “Man on the Spot” is often far better at relaying recessionary indicators than even the sharpest analysts. Until the current one, only one recession since the mid-1970s did not feature a prior downturn in vehicle sales, and that was the 1981 recession which came in close succession to the 1980 recession which did feature a prior decline in vehicle sales. The person buying a car, regardless of what economic data is available, knows more about their personal economy and economic confidence (or lack thereof) and is going to buy a vehicle based on their viewpoint. If we add these buyers together, the sum is the economy. Even the best analyst can’t beat the knowledge of a bunch of people on a car lot.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.