FORCED TIGHTENING OF LENDING STANDARDS CONSISTENTLY POPS A NEGLIGENT AUTO INDUSTRY
The trends and negligence are always the same in every auto cycle. The auto industry deserves the reputation it has acquired and no doubt entities such as "Government Motors" will soon return to the government feeding trough. After the government bails out failing players, creates programs such as cash-for-clunkers (which intentionally pushes up car prices) and lowers lending rates and allows reduced lending sandards, the industry goes through the Intial and Bridge states before facing the inevitable ending part of the cycle.
THE END CYCLE
Demand begins to fall as lending standards are increased due to rising delinquencies & defaults rise as a consequence of sales to to sub-prime buyers, required to maintain sales volumes.
The timing is easy to identify starting when lending standards break significantly above trend. In this cycle this occurred in Q4 2015.
We see from above that Lending Standards began tightening more aggressively in Q4 2015. Below we see this correlates with the auto sector sales plateauing.
Sales initially plateau versus fall in a sustained fashion because of sales incentives forced to be offered by the car manufacturers.
However the incentives are fighting tightening lending standards and as such dealer inventories immediately start climbing.
Consistent with every auto cycle, it is only a matter of time before sales incentives are insufficient to attract new buyers as credit standards are increasingly tightened due to accelerating delinquencies from the earlier volume of sub-prime and extreme sub-prime sold.
APRIL SITUATIONAL ANALYSIS
- Motor vehicles and parts spending subtracted 45 basis points from the first-quarter GDP's feeble 0.7 percent growth due to a 4.6 percent drop in unit auto sales.
- While still at a high level, auto sales growth clearly stalled at the start of the year.
- A Federal Reserve Senior Loan Officer Opinion Survey recently indicated tightening in lending standards amid falling demand.
- As auto loan delinquencies are back to recessionary levels, lenders feel unwilling to extend credit, while prospective buyers might not be able to afford less generous loan terms.
- Auto-sales growth seems unlikely to significantly boost personal spending in the second quarter.
- While a 4 percent rebound in unit auto sales in April projected by the Bloomberg survey consensus seems feasible — probably a result of a recovery from the March weather-related drop — the trajectory of growth will probably flatten.