Retail Looks Meh, Unless You're Selling Cars
Have a look at retail sales. They have been fairly soft, disappointing, or whatever measured phrases like “OK, not terrible, but not great” that analysts and commentators favor to indicate mediocrity. Nearly all consumer spending reports are showing soft to flat data.
There is one notable exception, however, and that’s automobiles. Cars and light trucks purchased for homes and businesses are selling at a record pace -- a run rate of more than 18 million vehicles this calendar year.
Why is that?
Aside from the generally improving U.S. economy, there are three reasons we can point to: falling gas prices, the aging of America’s auto fleet and credit availability.
Falling gas prices affects both the kind of autos purchased as well as total sales. When gas prices drop substantially, sales of hybrids and smaller, more fuel-efficient vehicles tend to fall, while larger, less-efficient sport utility vehicles, trucks and large sedans see more sales. A Bloomberg analysis from last year shows it takes decades to make up the premium cost of a hybrid over a comparable conventional fuel-efficient compact. With the exception of Teslas, electric car sales fall, too (though some claim that plug-in cars have not been especially impacted by falling gas prices).
Data from Autodata Corp. show that through August of this year, U.S. auto dealers sold nearly 600,000 more SUVs and pickups than in the first eight months of 2014, and almost 168,000 fewer cars. Consumers with more cash in their wallets are buying more vehicles; of those increased purchases, we see larger vehicles -- which thrills manufacturers, as these have much higher profit margins as well.
Perhaps part of the reason for this increase is the age of the 254.4 million vehicles on America’s roads. In 2007, the overall median age of an automobile in the U.S. was 9.4 years, a significant increase over 1990 (6.5 years) and 1969 (5.1 years). While automobiles today are of better quality and, therefore, last longer, that does not completely explain the recent big jump in the age of the fleet.
Where we really saw a move up in fleet age was during and after the Great Recession. New car sales dropped to below 6 million annual units, down from a more typical range of 10 million to 15 million vehicles sold. That lack of a few million new cars raised the overall age commensurately.
The fleet age hit 11.4 years in 2013, according to Polk, before reaching a record 11.5 years this summer. Note also that 2009's Cash for Clunkers program -- criticized by many as inefficient and ineffective -- took 690,000 cars off the road. These vehicles were ostensibly older and less fuel-efficient than average.
The third, and in my opinion most important, reason for the sales boom has been credit availability. Unlike home mortgages and even traditional credit cards, loans for autos have been readily available. This is true regardless of factors that would prevent the average shopper from qualifying for a mortgage.
According to research by the New York Fed last year, buyers in the lowest credit-score category (less than 620) account for the second-highest amount of auto loan originations. That makes it very clear that credit to purchase or lease vehicles is readily available.
Several people have warned that subprime auto loans are setting the U.S. economy up for a 2005-2009-like subprime housing bust. Although subprime auto loans are defaulting at about an 8 percent rate, this is not the same as the subprime mortgage collapse. The N.Y. Fed also noted that “the volume of subprime mortgages outstanding in 2007 was nearly four times the volume of subprime auto loans outstanding today ($250 billion).”
Consider this: It takes nearly 500 days from default to foreclosure to repossession of a home. On the other hand, the timeline for repo’ing a car is nearly instant. The bank or lease company is the owner of the vehicle, and the possessor of the car is merely its authorized user -- not an owner. He or she does not become the owner until it is paid off. Miss a few payments, and your car is remotely disabled and the repo man shows up to collect either a payment or the car itself. These days, vehicles are easily tracked, by its own electronics as well as a vast network of surveillance components. Those missed payments will get your (and I use “your” loosely) car back on the used-car lot in as little as a week.
One last caveat: The N.Y. Fed believes that “in the short-run a 100-basis-point increase in interest rates will cause light vehicle production to fall at an annual rate of 12 percent and sales to fall at an annual rate of 3.25 percent.
Auto sales reveal to us the dependence of the American consumer on cheap, readily available credit. Make credit more difficult to obtain, and decreased spending follows. As credit availability goes, so goes retail sales (and homes and autos and durable goods).
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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