When The Wheels Stop Rolling

When it comes to new car sales, most Americans are payment buyers.

We want a good deal, for sure, but we really need a car payment that fits our monthly budgets.

That’s a problem, given that we also want premium brands, snazzy features, and, for many of us, hulking big machines that look like they’d be more at home tearing up jungle roads than cruising on asphalt around town or on the interstate.

All of that stuff costs money, which is in short supply with modest wage growth.

But that’s OK. For the last several years, automakers, or at least their financing arms, have had an answer to keep the sales humming.

Extend, extend, extend.

Four-year car loans were the norm for many years. Then, as car prices crept higher, the number moved to five years. Now, a full 30% of new car loans stretch to 80 months, or almost seven years!

The average car loan is 68 months. That’s just over five and a half years. At this rate, buyers are at risk of their vehicles breaking down before they’re paid off.

And longer loans weren’t the only extension that financiers made. Lenders also extended or expanded their view of credible borrowers, reaching down to more subprime clients. This goes a long way in explaining how we reached a record pace of 18 million vehicles sold in December 2016.

It appears those days are over.

In March, the sales pace dropped to 16.64 million, missing expectations of 17.3 million, and that followed a dip in February to 17.6 million.

We’ve been forecasting a drop in new car sales for several years, based on predictable consumer spending patterns. It’s telling that dealers had to go to such extremes to keep the steel rolling off the showroom floor.

But the drop in auto sales isn’t just a cause for concern in the auto industry. It foreshadows slower consumer spending in general, which will keep a lid on GDP growth.

The problem is that most consumers borrow money to buy cars and it’s unlikely that, if they stop buying cars, they’ll borrow at the same rate to purchase other things.

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Gary Anderson 1 year ago Contributor's comment

Sales commissions are going down too. Restaurant sales, meaning tips, are down too. There is a multiplier effect. Easy loans but tight money on main street is a problem as rents and housing goes up in speculation.