Has The Bubble Burst?

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This week’s report about a stagnation in U.S. vehicle sales may be a sign that the auto industry is about to head back down the mountain at a rapid pace after a peak last year.

Deutsche Bank said March’s weak sales, coming amid rising interest rates and a slide in used-vehicle prices, make for a potentially slippery outlook. Industrywide deliveries last month slowed to a seasonally adjusted annual pace of 16.6 million vehicles, contradicting analyst expectations that the rate would accelerate to 17.2 million. Automakers set a record in the U.S. last year, with 17.6 million vehicles sold.

“Somewhat ominously, today’s market increasingly resembles one we described in ‘A Triple Threat’ (Feb. 20, 2004),” Deutsche Bank analysts Rod Lache, Mike Levine and Robert Salmon wrote in a note on Tuesday. “In that report we highlighted the risks to the industry from rising rates, rising negative equity in vehicle loans and used vehicle-price deflation. This could lead to deteriorating affordability, delayed trade-in cycles, consumer shifts from new to used, diminishing credit availability and deteriorating mix/pricing.”

A key concern is that fewer cars are being taken off the road – scrappage has declined to about 11 million a year from about 13 million to 14 million a decade ago. While net new drivers jumped to 4 million in 2015, that may not be enough. Total vehicles in the U.S. have increased to 270 million, from 249 million at the end of 2012.

“This has led us to question whether the U.S. is broadly oversupplied, and whether trend demand in the 17 million range is fundamentally supported,” the analysts wrote. “If it is not, the oversupply should be self-correcting – the U.S. market will experience declining used-vehicle prices, pressuring new vehicle sales.”

Bonds comprised of subprime auto loans were a bright spot for the securitization industry following the housing bust. In recent weeks, however, analysts and investors have been debating what impact rising delinquencies may have on the sector. “Credit performance for both prime and subprime auto loan ABS is expected to continue to deteriorate, although at a moderate pace,” analysts at Bank of America Merrill Lynch said in a report last week.

Deutsche Bank also noted the following:

• Used-vehicle price declines accelerated to 7.7 percent in February, from an average fall of 3.5 percent in the first nine months of 2016.

• Sales have bifurcated, with significant declines for passenger cars, while trucks hold at a 10 million-11 million a year pace

• Ford Motor Co. and General Motors may need to cut their car production again in the second quarter and add additional incentives to keep inventories manageable

• A few select market segments have a positive outlook, with pickup demand up 6 percent so far this year, and the analysts view American Axle & Manufacturing Holdings Inc. and Dana Inc. as “compelling” thanks to their exposure to the market segment.

• Delphi Automotive, BorgWarner Inc. and Goodyear Tire & Rubber Co. have a positive long-term outlook.

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9 COMMENTS

  1. The average age of cars on US roads is near all-time highs, over 11 years old, and plenty of cars made in the 1990s and even late 1980s are still in daily use. That doesn’t even bring pickups into the equation. Many of those in regular use are even older, and as pseudo-commercial vehicles they were designed from the beginning for 20–30 year lives.

    This has obvious implications for all these glib pronouncements about all those self-driving cars everyone is going to be using in “just a few years”. People aren’t going to be able to afford them, since affordability is the big reason so many older cars are still in use now.

    Autonomous cars are the answer to a question no one has asked, and as mentioned here before, the powers that be want to get cars entirely out of cities and get everyone on mass transit, not in fleets of individual self-drivers.

    The older the US car fleet gets, the more ridiculous the ideas of a driverless-car future appear.

  2. My parent’s 200x Minivan apparently failed state inspection this week. Too much rust on the rear wheel wells. This is pretty common with the last generation minivans. Dad attempted to Bondo the holes, but might have missed one or just the guy was in a bad mood or something. They like minivans and have always bought Chryslers, but now that the only one left is the (mighty expensive and not really a minivan) Pacifica, they’re shopping for Jeeps. I guess they really liked my Cherokee Trailhawk, but who knows? This sounds like it might be a good time to buy new.

    Of course they could just go down to one vehicle, but they’ve had 2 cars since the 1970s, so I don’t think that’s going to be an option…

      • Thanks for the tip. Just read your review and it sounds pretty good. Just have to convince the old man that Fords are OK vehicles. If it is anything like my work F150, it shouldn’t be all that difficult.

        I was also thinking they could pick up a 1st gen Volt coming off lease. Would be a great 2nd car and they don’t need the fast charge station installed since it would sit at home much of the time. And it would give dad something to do, since he could find all the “free” charging stations around town and abuse the courtesy.

        But getting them away from Chrysler will be tough…

        • Hi Eric,

          There’s also the Nissan NV.

          Or – how about a used (but newer/lower miles) Chrysler? If you include the Dodge version in your search, there should be plenty of good ones available to choose from.

    • Par for the course with modern state, central bank, and often media supported companies. They don’t know what they’re doing and they are proud of it.

      Remember the first TM product didn’t even have a BMS that prevented the Li-Ion battery pack from dropping below the critical charge level. They couldn’t even have hired an engineer who knew that very basic thing. Then they blamed their customers. Which is another thing these favored companies get away with. They can blame their customers. If Ford or GM tried to blame their customers even if the customer did something stupid they are considered in the wrong.

    • Seems fitting, doesn’t it? People who place a deposit on cars that they never seen nor driven, and which never seem to get built, end up be guinea pigs for cars that haven’t been tested. There’s a certain justice in that.

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