‘Potential’ without Perspective

Posted Friday, Aug. 01, 2014  comments  Print Reprints

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Last week brought a slew of positive news for the automobile industry. Most of it sprang from analysts’ predictions that by this year’s end Americans would once again have purchased more than 16 million new vehicles. Everyone sees this as another sign that our economy is finally about to break loose and truly catch fire.

Of course, to us in the larger Texas cities, the concept of an economy that still hasn’t bounced back from the downturn of 2008-09 is almost foreign; we started recovering from that crash as early as 2010. Four years ago the nation’s economic news was uncertain at best, and new car sales were just recovering from 2009’s pitiful 10.4 million. Yet many of our North Texas dealers weren’t just thriving, they were having a record year for profits. So if we couldn’t relate to the idea that the economy wasn’t yet fully back to normal, that was understandable; for the most part, Texas was doing just fine.

We should remember, however, that concluding, “16 million new car sales means retail sales of durable goods are back to where they should be” doesn’t align with our consumer-based economy’s potential. That number is actually more of a baseline of past performance.

After all, we first topped 16 million new car sales back in 1986, when the nation’s automotive fleet was far smaller than it is today. And there were only 240.1 million Americans then, in contrast to 316.9 million now. So no, 16 million new car sales doesn’t signal an impending boom.

In fact, considering the time it would take to turn over the national fleet of automobiles, and taking the size of the adult working population in account, in order to produce the same economic impact as new car sales did in either 1986 or 2000 we would need to sell 21 million new vehicles this year.

Equal Numbers, Triple the Cost?

In what seems like another bit of good news for the industry, the latest Equifax report offered showed that total outstanding new car loans in America have exceeded the $900 billion mark, setting another all-time-record high. This was reported as more proof that our economy is doing incredibly well.

In reality, the more important statistic is actually how many outstanding car loans there are, as compared to the numbers in years gone by. Why? Because, given the higher prices of new cars, the total dollar amount of loans on them might easily set records even if the total number of loans had fallen.

That unknown aside, a salient — and troubling — statistic in that Equifax news release was that fully 32 percent of all recently approved car loans fell into the subprime category, meaning the loans were made to buyers whose credit scores were less than perfect. That one figure led a few business news outlets to publish stories asserting that we are back in another risky financial bubble situation; but now, instead of home mortgages keeping bankers and investors awake at night, it’s car loans, they implied.

That’s not true, because “serious” 60-days-and-older delinquencies are still less than 1 percent of all loans. In anyone’s book, that is an outstanding repayment situation, but it’s not uncommon for car loans: Americans have never been known to default in any substantial numbers on car payments. Not during the Great Depression, not during any subsequent recession, and not even during the Financial Meltdown of 2008.

One in Three Marginal

So why is the fact that 32 percent of newly originated car loans fell into the subprime category so troubling? It means the quality of our debt has changed dramatically. In decades gone by it was not unusual for a finance manager at a large volume dealership to have maybe a handful of credit rejects in any given week, but never one in three applications.

The fact is that, three decades ago, someone with marginal credit could not acquire a loan for either a new car or a late-model used car without providing a huge cash down payment — along with proof of having worked years in the same job and having lived for years at the same address. No captive finance companies, such as GMAC or Ford Motor Credit, nor any bank would lend more than the original invoice on any vehicle, even if one had outstanding credit. Therefore, if someone had a troubled credit history, often his or her only avenue to secure a vehicle loan was buying through a credit union — or, failing that, buying from a tote-the-note used car lot.

Starting in the mid-1990s, though, the subprime car loan programs began, and it’s been a growing industry every since. If you’re wondering how many new cars we would purchase in America today if the stringent credit requirements of the past were still the norm, my guess is that we’d be back selling 11 – 12 million new cars, tops.

Yet even that doesn’t tell the whole story.

Poor Folks Have Poor Ways

The big force driving the new car market today is that sales of luxury vehicles, particularly high-end SUVs, are booming. Nationwide they’re in such short supply that most luxury SUV buyers must wait until dealers get their next shipment to find one that isn’t already sold.

Odds are small that any of the loans acquired for those vehicles fell into the subprime category.

No, to get the clearest snapshot of the American consumer today, it would be nice if we could compare the financial characteristics of those buying luxury cars to those of volume buyers of mainstream products. We haven’t done that so far, but it’s probably fair to assume that, of the 32 percent of new car buyers classified as subprime borrowers, a disproportionately high percentage bought lower-priced automobiles. That seems to be one of the truest things you can say about the state of the average worker’s wages, and possibly about income inequality, today. How long the average person holds onto a car before trading it in on a newer model validates that truth: Right now, the average “new” vehicle on the road is almost 12 years old.

But again, our overall new car volumes obscure much of this in Texas, at least in or around our major cities. Drive 20 miles outside of downtown Fort Worth, or 30 miles outside of downtown Dallas, and you’ll see middle-class and upper-middle-class neighborhoods to the horizon. The malls are full almost every day of the week, and FedEx trucks are delivering goods bought online almost around the clock.

Define “Confidence”

Recently Business Insider published a list of 27 maps that define America. One showed that half of our population now lives in a surprisingly small number of counties, just 146, across the country, with the other half of all Americans living in the other 3,031 counties. Maybe that’s the real secret to predicting America’s future haves and have-nots, because in those 146 counties holding half of the population, one will also find the largest volume new car dealers in America, as well as the cities posting the fastest population growth.

Our country’s more rural areas just don’t have enough population density to force the large-scale economic growth that propels growing employment and wages.

This may also explain why, instead of the baseline 100 percent set in 1986, when we first bought 16 million vehicles, our Consumer Confidence Surveys remain stuck at around 85 percent. Those of us living in growing metropolitan areas remain most optimistic. Our rural cousins, less so, may be confident only that their future is a bit more dire.

© Ed Wallace 2014 Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism. He hosts Wheels, 8:00 to 1:00 Saturdays on 570 KLIF AM. E-mail: wheels570@sbcglobal.net; read all of Ed’s work at www.insideautomotive.com

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