- Inflation report was mixed; financial markets responded negatively.
- Consumer credit grows but at a slower rate.
- Auto loan performance deteriorated, defaults still low.
The financial markets responded negatively this week to a mixed August inflation report that showed headline inflation coming down slightly, but not as much as expected, and showed core inflation accelerating with rents accelerating and food prices still growing even with gas prices declining.
Retail sales in August were stronger than expected. Consumers spent less on gas and more on home improvement and eating out. Retail sales are not indicating any evidence of the consumer pulling back spending. Adjusted for inflation, spending increased in August from July and was up from a year ago.
Consumer credit growth is robust but slowing. Auto loan performance has deteriorated, but high delinquency rates are not converting into high default rates. Auto loan credit tightened again in August across all channels and by most lender types.
Consumer sentiment has increased again in the first half of September.
Inflation Unexpectedly Increases in August
Inflation, according to the Consumer Price Index (CPI), increased in August when a decline had been expected, but headline year-over-year inflation declined again from a peak in June.
The headline aggregate measure increased 0.1% when a 0.1% decline was expected on a seasonally adjusted basis. The increase was an increase from the unchanged index in July. The core CPI, which excludes Food and Energy, accelerated to an increase of 0.6% from a 0.3% increase in July.
Most top-level categories saw increases in August, with only transportation down and apparel unchanged. Gasoline and airline fares saw the biggest declines. Food still saw a 0.8% monthly increase, which was a deceleration from the 1.0% increase in July. Rents saw an acceleration in increase to 0.8% from 0.7% in July.
Vehicle prices again moved in different directions in the CPI, finally reflecting what we have been seeing in the auto market, as new vehicles saw a 0.9% increase in August, but used vehicles saw a 0.1% decline.
On a year-to-year basis, the core CPI accelerated to a 6.3% increase. Core CPI peaked in the y/y change at 6.5% in March. The overall CPI declined to 8.3% from a peak of 9.1% in June. The categories with the largest year-over-year increases in August were fuel oil (70%), eggs (40%), airline fares (33%), and gasoline (26%).
Retail Sales in August were Strong but Slowing
Retail sales in August were stronger than expected, but July’s sales were revised down. The initial estimate for August showed spending increased 0.3% in August when a modest decline was expected.
The auto sector outperformed as sales excluding motor vehicles and parts declined 0.3%, while sales of motor vehicles and parts increased 2.8%. As gas prices declined, spending at gas stations declined 4.2%.
Categories saw mixed performance in August. Furniture, home furnishing, electronics, and appliance stores (-0.8%), non-store (ecommerce) retailers (-0.7%), and health and personal care stores (-0.6%) were also down. Miscellaneous stores (+1.6%), building material and garden equipment stores (+1.1%), and food services and drinking places (+1.1%) were the largest gainers.
Retail sales were up 9.1% from a year ago on a nominal basis. Compared to last year, only furniture, home furnishing, and electronics (-3.2%) were down. The biggest year-to-year gainers were gas stations (+29%), miscellaneous stores (+15%), non-store (+11%), and food services and drinking places (+11%).
Retail sales are measured in dollars, so higher inflation plays a role in the measured increases. Adjusted for inflation using the CPI, retail sales increased 0.2% and were up 0.8% from a year ago.
Consumer Credit Growth Slowed in August
The Federal Reserve reported that Consumer Credit, excluding housing-related debt, grew by $23.81 billion in July, which was a substantial deceleration from June’s $39.06 billion.
Auto loan performance in August was mixed as severe delinquencies increased but defaults declined. Delinquencies of 60 days or more increased by 6.4% and were up 35.6% from a year ago. In August, 1.65% of auto loans were severely delinquent, increasing from 1.56% in July and the highest rate since 2010. Compared to a year ago, the severe delinquency rate was 45 basis points higher. In August, 6.38% of subprime loans were severely delinquent, which was an increase from 6.19% in July.
The subprime severe delinquency rate was 185 basis points higher than last year, and the August 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, and defaults declined in August.
Loan defaults declined 20.9% in August from July but were up 3.7% from a year ago. The annualized auto loan default rate in August was 1.91%, which remains well below the 2.81% rate in August 2019.
Access to Auto Credit Tightens in August
Auto credit access tightened again in August. Our Dealertrack Credit Availability Credit Total Loan Index declined 0.8%. Credit tightened across all loan channels and most lender types in August, with new-vehicle loans showing the most tightening and with credit unions tightening the most across lenders.
Consumer Sentiment Improves Mostly on Future Outlook
The initial August reading on Consumer Sentiment from the University of Michigan increased 1% to 59.5. The increase was primarily from improving future expectations. Expected inflation rates declined. Consumers’ views of buying conditions for vehicles were steady and near an all-time low.
The daily index of consumer sentiment from Morning Consult increased 1.6% in the first 15 days of September. The index has improved as gas prices have been falling. The average price of unleaded nationally was $3.69 Thursday, down 26% from the peak in June.
JOIN US: The Q3 Cox Automotive Industry Insights and Forecast Call will be held on Wednesday, September 28. Jonathan Smoke and the Industry Insights team will host a conference call to review industry performance in the third quarter and what is expected for the remainder of the year. RSVP to attend.
Jonathan Smoke is chief economist at Cox Automotive.