Pressures on used car prices is manifesting in slumping new car sales, which have fallen for five straight months. Against this backdrop, record incentives are losing their ability to incentivize.
Adding to the angst, losses on securities backed by auto loans are piling up; all signs point to the 2015 vintage of subprime-auto ABS being a record year for bloodletting. Delinquencies for even prestigious prime-borrower-backed auto ABS are amassing at a rate that has surprised industry followers. Rumblings about fraud at fast-money car lenders have also begun to percolate. So lending standards are tightening after years of laxity.
Layoff announcements have followed. It started with the major car manufacturers announcing temporary dismissals at year-end. But the bad news has since solidified into permanent layoffs. Absent a meaningful rebound in sales, supplier manufacturing and auto dealership pink slips will follow.
Thus there is pressure building under the unemployment rate, even as it recently hit this cycle’s nadir of 4.3 percent, the lowest since 2001. Further evidence is becoming increasingly clear in credit card delinquencies; Experian reported the national bank card default rate rose to 3.53 percent in May, a four-year high. There are even nascent signs that households have begun to struggle to make their mortgage payments.
Peek under the hood of the University of Michigan Consumer Sentiment survey and you will see growing anxiety as the number of people who say they expect higher unemployment has bottomed and begun to tick up. Workers in vulnerable industries have started to sense the flip side of the very same good news being celebrated by investors.
Finally, those whose fortunes are tied to commercial real estate have started whispering among themselves. Cycles never end the same way, but old hands can attest to the sheer amount of supply building in the pipeline and its implications. It’s all good and well that strained industries want to extract what value remains from their CRE exposure as part of their exit strategies. But this only works in isolation. If motivated sellers move in tandem, you can bet teetering CRE valuations will be among the casualties, taking many over-exposed mid-size and small banks down with them.
Call it a confluence of factors that bodes ill for the economic recovery, even as optimists hope the growth streak can stretch into a 10th year. By the way, leading the optimists’ charge is the Federal Reserve itself.
Central bank policy makers’ expectations for future growth indicate the current economic recovery will unseat the record holder, the expansion that finally flamed out in 2001 after enjoying a life of exactly 10 years. But then it is the Fed that’s the very last to capitulate, to say nothing of forecast, a slowdown in economic activity.
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