Fed Rate Hikes Cascade To Auto Industry

Summary

• The Fed's recent interest rate increases to curb inflation have quickly cascaded to the auto industry.
• S&P Global Mobility new vehicle registration data combined with Trans Union financial data indicate not all credit score tiers have been equally impacted by the rate increases.
• The gap between the APR for the lowest tier customers and the highest in June 2019 was 9.3 PP, but that range has narrowed to 7.3 PP this past June.

Elena Perova/iStock via Getty Images

The Fed's recent interest rate increases to curb inflation have quickly cascaded to the auto industry. The average interest rate on a new vehicle loan rose to 4.8% in May 2022, its highest rate since pre-pandemic March 2020 (5.3%). After being in the 4.0 range from last September to December, this metric quickly climbed almost a full point from December to May 2022.

S&P Global Mobility new vehicle registration data combined with Trans Union financial data indicate not all credit score tiers have been equally impacted by the rate increases. As the chart below illustrates, the average APR has risen this past May when compared to a year ago for the upper level credit tiers, but not for the lowest tier, including credit scores between 300 and 600. While scores in this lower tier have risen in the past several months, they remain below a year ago, the only tier for which this is the case.

Further, the range between interest rates has narrowed from pre-pandemic levels. The gap between the APR for the lowest tier customers and the highest in June 2019 was 9.3 PP, but that range has narrowed to 7.3 PP this past June.

Lastly, these interest rate increases have propelled loan and lease monthly payments to four-year highs; as the chart below indicates, the average loan APR in June of $686 is the highest payment dating back to at least the start of 2019, and it is $79 a month higher than the payment a year ago. Similarly, the May 2022 lease payment of $559 is the highest in this time horizon and up $71 from June 2021. In the near time, these higher interest rates and corresponding monthly payments will curb retail demand, though natural demand is still being masked by the inventory shortages.

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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Comments

[Agar Capital Management]

Problem is that the FED target may not be achieved and we may end up seeing wage-inflation spiral much before that. There is significant shortage of front-line workers in most, if not all, industries. Mid and mid-senior level management positions are being trimmed to improve profitability. Front-line workers are either not coming back to work or have retired early. In short, before FED realize their dream of slowing economy, there is a high likelihood that the pressure from increase in wages may set in and inflation expectations get set-in household decision making as a new trend.

[wdjax0n]

It has long been known that the FED targets sectors in order when it wants to throw the economy in reverse: first, housing; second: autos as noted; third, capital goods; then labor markets in which it aims to increase unemployment as a policy lever. When there are supply problems, it just cuts back on demand without oversight.