Smoke on Cars
Auto Market Weekly Summary
Monday November 18, 2019
Article Highlights
- Inflation trend is mixed.
- Wage growth is slowing.
- Consumers with weak credit see higher, now lower, rates.
The inflation trend is mixed. Depending on the metric and comparison period, it is possible to say inflation is stable, accelerating or decelerating.
Using the Consumer Price Index, aggregate inflation is below the Fed’s target but accelerating as energy, food, health care, and transportation are getting more expensive. Core inflation, which ignores volatile food and energy prices, is running higher than the Fed’s target but trended lower in October as housing inflation decelerated and apparel prices declined.
Wage growth slows: Wage growth is still outpacing inflation, just not quite at the same pace we were seeing earlier this year. With the slower increase in wage growth reported earlier this month and increasing overall inflation, real hourly earnings declined in October relative to September to the lowest pace of growth in six months.
Some consumers see higher loan rates: Consumers with weak credit are seeing higher, not lower rates. Consumers with subprime credit are seeing average rates approaching 19% so far in November. Consumers with great credit and FICO scores of 760 or higher are seeing average auto loan rates in November that are about 60 basis points lower than the start of the year.
As a result, the composition of auto loan originations is changing, leading to year-over-year declines in subprime auto lending. Similar trends in credit cards leading to tighter credit and persistently high rates for consumers are likely impacting the slowing growth reported in retail sales.
Used-car prices jump: Following the same pattern observed last year, the used-car price index component of CPI jumped 1.4% in October, reversing much of the 1.6% decline reported in September, and also contributing to the higher aggregate inflation trend in October.
The methodology that Bureau of Labor Statistics follows for measuring used-car prices causes big fluctuations each September and October as the basket of vehicles tracked has model year changes each September. This year, the September decline was more in line with what we are seeing in the Manheim Used Vehicle Value Index. However, the October increase is not consistent with the higher than normal levels of depreciation we continued to see in October. [Read more about that.]
Looking ahead: This week, we’ll see data on new construction and existing home sales for October and the final reading on consumer sentiment for November. The Fed will release the minutes from its October meeting. We may also get some news or clarity on progress on the “phase 1” trade deal with China, the postponement of new tariffs on autos and parts from Japan or Europe, and Congressional debate on the ratification of USMCA, the replacement for NAFTA.