- Consumer sentiment strong, but consumer spending slowing.
- Loan delinquencies, especially subprime, are rising.
- Tax refunds are beginning, signaling spring used-car bump.
We continue to expect this year to be “not so bad” for the industry and especially for dealers as a modest decline in new retail sales will be offset by the gain in used retail sales.
Consumer spending slowing: Consumer sentiment is stronger so far this year despite modestly higher prices and slowing real wage and income growth. One of the biggest concerns for the U.S. economy is the amount of debt consumers have taken on, especially at the end of 2019.
Consumers have been relying on credit extensively to fuel spending growth, but spending growth is now slowing. Some of the slowdown may be related to segments of consumers, like subprime borrowers, falling behind on debt payments including auto loans.
Rising delinquencies: We are not yet seeing the auto loan default rate grow. However, auto delinquency rates are up, especially for subprime accounts. Subprime auto loans that were severely delinquent in January were at the highest level going back to at least 2006.
Tax refunds arriving: We are around a week away from tax refunds showing growth year over year, but the average refund this year is already showing modest growth over last year. We expect that total refunds will be up over last year along with the average refund amount. At that point, we expect the spring used-car market to take off and for the uptick to last for six to nine weeks.
Looking ahead: This week we will get new construction and existing home sales data for January, and the Fed will release the notes from their January meeting.