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Smoke on Cars

Auto Market Weekly Summary: April 17


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Article Highlights

  1. Inflation signals mixed, especially on new and used vehicle prices.
  2. Retail sales declined more than twice as much as expected.
  3. Auto loan performance improved compared to February but is worse than a year ago.

Year-over-year inflation in aggregate declined in March more than expected, but core inflation increased.

Retail sales declined in March as more categories were falling. Adjusted for inflation, retail sales declined and were down from a year ago.

Auto loan performance improved in March from the seasonal impact of households receiving tax refunds. Even so, loan performance remains worse than a year ago.

Auto credit access improved in March, but access to used-vehicle loans tightened, and only new-vehicle loans improved.

Inflation Signals Mixed, Especially on New and Used Vehicle Prices

According to the Consumer Price Index (CPI), year-over-year inflation declined again in March, but core inflation increased.

The headline aggregate measure increased by 0.1% on a seasonally adjusted basis, which was lower than expected. The deceleration followed a 0.4% increase in February. The core CPI, which excludes Food and Energy, increased by 0.4%, following a 0.5% increase in February.

Medical care and transportation saw declines, while all other major categories saw decelerating increases. Only education and communication saw an accelerating increase, and that was driven by a large increase in childcare.

Used cars saw another decline, which is inconsistent with what we have observed in real retail transactions. New-vehicle prices saw an accelerating gain, which is also inconsistent with what we have observed in real transactions in March as incentives and discounting grew.

Shelter is finally starting to decelerate but is still driving much of the above-target inflation. Energy and food are responsible for much of the improvement in the aggregate index. Declines in shelter, food, and energy are helping lower-income consumers see accelerating relief from what has been an extreme amount of inflation over the last year.

On a year-over-year basis, the core CPI increased to a 5.6% increase from 5.5% previously. The overall CPI declined from a year ago to 5.0% from 6.0% previously. Our estimated CPI for the lowest income quintile fell to 12.1%.

Retail Sales Declined More Than Twice as Much as Expected

Retail sales declined 1.0% in March, which was more than twice the decline expected. The auto sector underperformed the overall retail market as sales excluding motor vehicles and parts declined 0.8%, while sales of motor vehicles and parts fell 1.6%.

Category-level performance was again mixed in March, but more categories were down compared to categories growing. Non-store retailers (+1.9%) and health & personal care stores (+0.3%) had the largest gains. Gas stations (-5.5%), general merchandise stores (-3%), and clothing and accessory stores (-1.7%) had the largest declines.

Retail sales were up 2.9% year-over-year on a nominal basis, which was down from 5.9% in February and 7.6% in January. Compared to last year, gas stations (-14.2%), furniture, home furnishing, electronics, and appliances (-5.4%), and building material and garden equipment and supply stores (-3.5%) were the only major categories down. Motor vehicles and parts were flat from a year ago, while food services and drinking places (+13%) was the category up the most. Adjusted for inflation using the CPI, retail sales declined 1.0% for the month and were down 1.9% from a year ago.

Auto Loan Performance Improved From February but Is Worse Than a Year Ago

Auto loan performance improved in March as a typical seasonal improvement in delinquencies and defaults was delivered by tax refunds. However, loan performance remains much worse than a year ago.

Loans that were 60 days or more delinquent declined in March for the first time in 11 months but were up 17.9% from a year ago. In March, 1.75% of auto loans were severely delinquent. That was down from February’s 1.90% rate but was the highest March rate dating back to at least 2006.

Of subprime loans, 6.75% were severely delinquent, down from 7.34% in February. Even so, that was the highest March severe delinquency rate dating back to at least 2006. The subprime severe delinquency rate was 110 basis points higher than a year ago, while the aggregate was 25 basis points higher.

Still, the high delinquency rate has not been leading to a historically similar level of higher defaults, and defaults also declined in March. Defaults of auto loans fell by 7.5% in total in March from February but were up 12.3% from a year ago. Defaults of subprime auto loans declined by 10.8% but were up 4.8% from last year.

Auto Credit Access Improved but With Wide Variations

Auto credit access improved in March, but trends varied greatly by channel and lender, according to the Dealertrack Credit Availability Index.

Our Dealertrack Auto Credit Total Loan Index measured auto credit loosened by 0.2% as the approval rate improved and the subprime share increased. However, rates increased, and terms shortened.

With preliminary data through the first half of the month, we saw credit access tighten with the widening of yield spreads and shortening of terms. Within the month, credit had tightened more initially following the failure of Silicon Valley Bank, most notably with yield spreads widening even more. However, by the end of the month, yield spreads narrowed some and more variation in approach by lender and channel became more significant.

New loans saw loosening in March while all types of used-vehicle loans tightened. On a year-over-year basis, all channels were tighter, with certified pre-owned (CPO) loans having seen the most tightening.

Jonathan Smoke is the chief economist at Cox Automotive.

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