Offside indicator - Rising car sales in the US do not necessarily mean the economy is thriving


Ian Kelly

Ian Kelly

Fund Manager, Equity Value

One statistic some commentators have been trotting out of late as a way of illustrating how well the US economy is doing is the ongoing uptick in car sales. After all, buying a new car is one of the bigger purchases people tend to make so one might reasonably assume an increase in sales volumes must indicate a similar improvement in consumer sentiment, right?

Well, let’s see how that argument stands up if we dig deeper into available data. The first number looks promising, if a little surprising, and that is, according to Bloomberg, three-month rolling US auto sales are now only about 3% off their pre-crisis levels. On the other hand, US labour force participation is down to 63% while duration of unemployment remains fairly high.

So, if the country’s labour force participation is at its lowest level since 1978, how can car sales be very nearly back to their boom-year levels? The answer would seem to lie in the ease with which almost anyone in the US can obtain a loan to buy a car – with a great example of this detailed in the Bloomberg business week article subprime loans are boosting car sales.

It tells the tale of one lady who visited a Chrysler dealership to buy a car for her daily commute. Despite a credit score of less than 500 – to put that in context, ‘prime’ is above 750, ‘sub-prime’ is below 620 and sub-500 puts you among the worst 8% of poor credit scores in the US – she drove away with a brand-new Dodge Dart.

A year ago, said the dealership’s owner, he would have told her not to bother even coming in but now, since she had a good job, all she needed was “a phone bill, a light bill, her last couple of pay-check stubs and some down-payment”. Hearing that, it is perhaps less surprising to learn sub-prime auto sales in the US now account for more than 27% of all loans for new vehicles – up from 18% in 2009.

So while, on the face of it, the US economy appears to be doing well, it is actually being juiced by low interest rates. Not only does this have the effect of making things more affordable, it also means, as we have flagged up before in articles such as Fever pitch, people are more willing to take on risk. In the context of loan companies, that will include lending to poorer credit risks.

According to analysts from Morgan Stanley, and as can be seen in table 1 below, spreads on car loans are at their lowest level since the credit crisis – down to just 30 basis points, having peaked at 850 basis points. Indeed, as can be seen below in table 2, which also comes courtesy of Morgan Stanley, car loans are the cheapest form of consumer financing – running at around 3% versus 12% for credit cards.

Floating rate 3yr auto ABS (asset backed securities)

floating rate 3yr auto abs spreads vs. libor (bps)

Source: Morgan Stanley research, February 2014

Current avg US bank loan rates (%)

current avg us bank loan rates (%)

Source: SNL, Morgan Stanley research, February 2014

Those looking for reasons to be cheerful about the US economy would probably do better to look elsewhere than car sales – in the opinion of The Value Perspective, that particular driver fails its test.


Ian Kelly

Ian Kelly

Fund Manager, Equity Value

I joined Schroders European equity research team in 2007 as an analyst specialising in automobiles. After two years I added the insurance sector to my coverage. In early 2010 I moved into a fund management role, and then took over management of two offshore funds investing in European and Global companies seeking to offer income and capital growth. 

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