Signs of Further Market Decline

The rumblings around a deterioration in the auto lending sector have gotten louder.

This morning the Federal Reserve published its bimonthly Beige Book report on regional economic activity, and it displays cracks in the auto finance facade.

Regional Fed banks report tightening credit in various pockets around the nation. For example, the New York Fed reported, “Retail and wholesale credit conditions were reported to be in good shape, though there has been further tightening for subprime auto loans.”

Tighter underwriting standards for subprime auto loans were also reported from the Cleveland Fed’s district. It should be noted, however, the Fed still views auto lending nationwide as “strong.”

This all points to a waning car sale market. Yesterday, the SAAR in May was lower again, although the pace of decline seemed to slow. The SAAR was at 16.6 million units last month — still a solid annualized rate.

Meanwhile, incentives continue to rise. Here’s how JPMorgan Chase & Co. described it today:

Incentive spending increased +12% y/y (or +$371) and increased 2% m/m to $3,509 (but is down ~7% from December’s decade-high mark of $3,766). Incentives increased at the same rate (+12% y/y) for both passenger cars and light trucks. In May, passenger car incentives averaged $3,678, in absolute terms larger than light truck incentives, which amounted to $3,404 (despite light trucks’ on average higher ATPs). Each of the Detroit Three increased incentive spend y/y in May though m/m spending trends moderated, with GM exhibiting the most discipline +4% y/y (+0% m/m), Ford +15% y/y (+0% m/m), and Fiat Chrysler +10% y/y (+1% m/m). According to preliminary TrueCar forecasts, incentive spend as a percentage of ATPs increased 70bp y/y to 10.4% though it has retreated modestly from the ~11% level reached in December 2016 and January 2017. Note, however, that TrueCar estimates ATPs (which are measured net of incentives) increased 1.2% y/y in May to $32,900 per vehicle (down slightly from April’s $33,112).

It’s the dreaded double-whammy: lower car sales and higher incentives.

 

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