It really helps an economy to have a robust car market. In the US car companies employ around 9% of the workforce which includes the businesses that feed off suppliers. The amount of people employed in a factory means those people need to buy groceries, get the dry-cleaning done and send the kids to daycare. Car factories are mini-cities. States fork out $100 millions in tax breaks for auto companies to set up facilities because of all the benefits that accrue and the likelihood that after the plant has been built the economics means they’re stuck for decades.
Even with borrowing rates at ridiculously low levels, inventories are back to the 1.2mn unit level just shy of the peak we saw at the same trough of GFC. Although inventories are at 2.82x sales right now (peaked at 4.7x during GFC) it is heading back up.
The big weakness in car sales is more an issue with companies than consumers. In order to shift metal deals got better and better. However many car makers fell into the trap of offering residual value guarantees on cars after 3 years. So as they were sweetening deals today, cars of three years ago were coming back onto their books but the car maker was losing money on 90% of the returns with average losses of $3,000 per car. All of this was bringing forward consumption.
Now we have a predicament of auto companies having to reevaluate who they finance. We’ve seen default rates from sub-prime borrowers jump 20% or more in recent months. When I was in Sydney a last month BMW was raked over the coals for offering a mother of 10 kids a car loan.
BMW Australia Finance was found to have loaned $27,000 to a single mother of 10 children even though she was in casual employment and had negative disposable income. It gave $23,300 to a refugee aged 21 who had been employed for just one month and whose income was overstated. And it loaned nearly $50,000 to a 76-year-old man based on earning projections rather than real income. The loan was almost twice the value of the car. I call that desperation and coming from a luxury maker speaks volumes how bad it must be among volume makers.
Car makers are desperate. Even my old man got a brand spanking new 7-series for $50,000 off list price that when he told me I thought he’d bought the outgoing model. It is not healthy in the auto space. Perhaps they’re singing Janis Joplin tunes in the hope that profitability is miracle restored. Forget it. We’ve already seen how heavily Class-8 highway truck orders have plunged for the last year. Now expect to see mass firings, plant line closures and losses moun in passenger cars.
This will be another blow to the gullible masses who think Central banks have steered us down the path to prosperity. They haven’t and once again the end of Obama’s presidency will earmark the state in which he left the economy. In a horrid state.