Auto Market Weekly Summary: November 14

Financial markets shifted to the positive last week, with weaker-than-expected inflation data pointing to an eventual end to rate increases. However, the Fed will likely raise rates by 50 basis points (BPs) in December as planned unless something more dramatic changes between now and December 14. We get November employment and Consumer Price Index (CPI) data before the next decision.

The October CPI inflation report indicated core inflation moderating in October, and headline and core inflation both declined on a year-to-year basis.

Consumer credit growth decelerated in September due to the slowing growth of revolving credit. Auto loan performance has deteriorated further as both severe delinquency rates and default rates increased in September. While delinquency rates are very high, default rates remain relatively low. Auto loan credit loosened in October across most channels and across all lender types.

Used-vehicle sales declined in September, and wholesale used vehicle prices dropped again. The Manheim Used Vehicle Value Index is now down 10.6% year over year.

Consumer sentiment declined in the first half of October, according to the University of Michigan. Of greater concern to the Fed is that inflation expectations are increasing again.

Inflation Slowed in October, Used-Vehicles Saw Large Price Declines

According to the Consumer Price Index, inflation slowed in October as core inflation decelerated. The headline aggregate measure increased by 0.4% when a 0.6% increase was expected on a seasonally adjusted basis. The growth was unchanged from September.

The core CPI, which excludes food and energy, increased by 0.3%, which was half of the prior increase and less than the 0.5% expected. Energy prices moved in different directions in October, with gasoline increasing but household energy declining. Both shelter and food price growth slowed. Few categories saw accelerating price growth.

Used cars, car and truck rental, and airline fares all saw large declines. Vehicle prices again moved in different directions in the CPI. They reflected what we have been seeing in the auto market, as new vehicles saw a decelerating 0.4% increase in October, but used vehicles saw a 2.4% decline. On a year-over-year basis, core CPI decelerated to a 6.3% increase. The overall CPI year-over-year declined to 7.7% from 8.2% previously.

Overall Consumer Credit Growth Slows, but Auto Loans Saw Increasing Growth

The Federal Reserve reported that consumer credit, excluding housing-related credit, saw growth decelerate to $24.98 billion in September, down from $30.19 billion in August. Credit cards saw substantial deceleration in growth as non-revolving debt (auto and student loans) saw increasing growth.

Car Loan Performance Declines

Auto loan performance in October saw further deterioration. Loans that were 60-days plus delinquent increased by 0.5% and were up 26.3% from a year ago. Of all auto loans, 1.73% were severely delinquent, an increase from 1.72% in September and the highest rate since January 2010. Compared to a year ago, the severe delinquency rate was 39 basis points higher.

In September, 6.69% of subprime loans were severely delinquent, a month-over-month increase from 6.66%. The subprime severe delinquency rate was 164 basis points higher from a year ago, and the October rate was the highest in the data series back to 2006.

Even though severe delinquencies are high, delinquencies are still not leading to pre-pandemic levels of defaults, but defaults increased in October. Loan defaults increased 4.6% from September and were up 19.6% from a year ago. The annualized auto loan default rate in October was 2.39%, which remains below the 3.10% rate in October 2019.

Auto Credit Loosens Across Most Channels and All Lenders

Auto credit access loosened in October, according to the Dealertrack Credit Availability Index. The Dealertrack Auto Credit Total Loan Index increased by 0.2%. Credit loosened across most loan channels and all lender types, with certified pre-owned (CPO) loans loosening the most and banks loosening the most across lenders.

Used-Vehicle Sales Dip in October

Cox Automotive’s used vehicle sales based on same-store estimates from Dealertrack indicate that used retail sales declined 9% in October and were down 13% from a year ago. CPO sales in October were down 4% from last year as sales volumes increased 3% from September.

Using estimates of used retail days’ supply based on vAuto data, October ended at 49 days of supply, down from 52 days at the end of September but higher than how October 2021 ended at 40 days. Leveraging Manheim sales and inventory data, wholesale supply ended October at 28 days, higher than how October 2021 ended at 20 days but unchanged from the end of September.

Wholesale Prices Drop for Fifth Consecutive Month

According to the Manheim Used Vehicle Value Index, wholesale vehicle values declined 2.2% in October on a seasonally adjusted basis. The decline left the Index at 200.0, down 10.6% from a year ago. The unadjusted price change in October was a decline of 2.1%, leaving the prices down 9.3% from a year ago.

In October, Manheim Market Report (MMR) values saw smaller-than-normal declines that were relatively stable over the month, culminating in a 2.2% total decline in the Three-Year-Old Index over the last four weeks. All eight major market segments saw seasonally adjusted prices that were lower year over year. Compact cars had the smallest decline at 6.1%, followed by vans and pickups.

Consumer Sentiment Falls in Initial November Reading

The initial November reading on consumer sentiment from the University of Michigan declined 8.7% to 54.7 as views of current conditions fell even more, and future expectations also declined. Expected inflation rates increased slightly. Consumers’ views of buying conditions for vehicles declined but was still the second-best reading since March. June was the all-time low in the reading.

Jonathan Smoke is the chief economist at Cox Automotive.