Another Debt-Fueled Spending Spree?

March 31, 2014
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Spending on new vehicles has been a bright spot for the U.S. retail sector. March sales estimates come out on Tuesday, and most expect a strong recovery after sales were depressed by the bitterly cold months of January and February.

But a closer look at the data on new auto purchases reveals some potential worries. Nothing is conclusive at this point, but there is a chance we are seeing another debt-fueled spending spree that will prove unsustainable. We are going to take a closer look at some micro data in the next couple of weeks, but thought we would outline the case based on the aggregate data.

New auto purchases have driven the consumer spending recovery to a large degree. The chart below shows the spending recovery for new auto sales and for all other retail spending. We index both series to be 100 in 2009, so the percentage change from any year to 2009 can be seen by taking the value for that year and subtracting 100.

 

houseofdebt_20140331_1

From 2009 to 2013, spending on new autos increased by 40% in nominal terms. All other spending increased by only 20%. Further, excluding autos, 2013 saw lower growth in nominal retail spending than 2012. As we’ve mentioned before, the spending cycle tends to be amplified when it comes to auto purchases, so the strong performance of autos shouldn’t be surprising. But at this point we are seeing stronger growth in auto purchases even four years after the recession ended.

Here is year-over-year spending growth on autos and other retail goods for 2012 and 2013. Spending has increased between 7% and 9% in these years. For other goods, spending increased by 5% in 2012 and only 3% in 2013. Without autos, 2013 spending looks a lot worse than 2012. If you want these in real terms, you can subtract off 2% to get a pretty close estimate.

houseofdebt_20140331_2

So what is wrong with autos driving the recovery? Isn’t this what we would expect given the cyclicality of auto sales? The concern is that a lot of auto purchases are being fueled with debt, given a strong recovery in the auto loan market. Below is the net flow of auto loans from 2002 to 2013. It is a net flow because it includes pay downs in addition to new originations. As it shows, auto lending in 2012 and 2013 tops any other year during the previous expansion from 2002 to 2007 (although it is still below the amount of new auto loans in 2000 and 2001).

houseofdebt_20140331_3

This could be benign. For example, one argument would be that this represents a well-functioning credit market. Households that deserve new loans are receiving them, which is exactly what the financial sector should provide.

Perhaps. But we know that the recovery in employment and income has been pretty weak in 2012 and 2013. Do we think that income growth justifies the large increase in auto debt? Who exactly is getting these loans? Are they borrowers who are seeing their income and employment fortunes improve? Will lenders continue to lend if risk-free rates rise?

We will further explore these questions in the coming weeks. For now, we just want to flag this as a potential worry. Something to think about.

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9 Responses to Another Debt-Fueled Spending Spree?

  1. kharris on March 31, 2014 at 7:13 ami

    While it is a separate issue from auto loans, the age of the fleet is generally taken to be a driving force in auto purchases. We had a very old auto fleet a couple of years ago. Has the pick-up in sales gotten us back near average?

  2. rvueco on March 31, 2014 at 12:02 pmi

    Subprime loans are still alive and kicking in the auto industries. Post-crisis loan standards exclude car loans. People may be delinquent on their mortgage but dutiful with their car payment. This is not a normal-functioning economy – an economy mostly supported by the biggest credit issuer with zero liability.

  3. Mark Paul on March 31, 2014 at 12:35 pmi

    Does this series take into account using home equity loans for auto purchases? If not, might this trend reflect that households with reduced home equity after the popping of the bubble now have to take out conventional (and non-tax-deductible) auto loans and leases?

  4. MN on March 31, 2014 at 12:38 pmi

    I agree, this is a sector to watch, but auto loan performance has generally been improving since 2008. Perhaps one way of thinking about the issue is who owns these loans. Ownership of non-revolving consumer loans (mostly auto because student loans are increasingly owned by the Feds) has shifted from deposit institutions to finance companies since 2008. Finance companies may have more liberal underwriting than depository institutions, but I would bet they are better than securitizations in which the originators do not suffer if the loan goes bad. And the securitization market for these loans is still pretty cool:

    http://www.federalreserve.gov/releases/g19/current/g19.pdf

    I’d say that the bigger issue is the rapid rise in student loan delinquencies, which are now at historically high levels:

    http://www.newyorkfed.org/householdcredit/2013-Q4/HHDC_2013Q4.pdf

    This is less likely to cause a financial panic because the government owns or insures most of these things, but I’m sure there are important macroeconomic consequences of millenials being chained to large, unsecured debts that cannot disappear in bankruptcy.

  5. Kevin on April 1, 2014 at 1:44 ami

    Seems possible that loan standards were abnormally tight in the post-crisis world, creating a backlog of decent borrowers who could not get an auto loan. Now that standards are loosening, we see more loan volume than in the previous expansion.

    It would be nice to know more about what drives the high cyclicality of car sales. If car loans are particularly sensitive to lending standards, then there will be more intertemporal shifting of sales from recession to expansion, creating cyclicality.

  6. dougk on April 1, 2014 at 6:46 ami

    Is this happening because people are not buying as many houses? If you can’t buy a new house, do you buy a new car instead? Hasn’t that happened before?

  7. ezra abrams on April 1, 2014 at 9:48 ami

    you are worried about 100 billion or so in auto loans ina 13 trillion a year economy ?
    do I have that right ?

  8. Martin K on April 1, 2014 at 4:32 pmi

    I don’t know if I would lose a lot of sleep over this. The lending environment for autos is pretty different from that for homes (which I assume is the unspoken analogy here).

    With homes you have a loan balance that doesn’t decline much in the early years, on an asset that is often expected to maintain or even increase in value over time and that represents a large part of a household’s income.

    For an automobile you have a loan balance that amortizes fairly quickly, on an asset that is known to depreciate over time, and that represents a much smaller part of a household’s income.

    Sure, a given lender may make some poor decisions and lose money on a certain pool of auto loans, but the potential for globally destabilizing credit events seems much smaller.

  9. George Cornelius on April 1, 2014 at 9:59 pmi

    Friends in the auto business tell me tax refunds is a driving factor in car sales this time of year.