The Federal Reserve of New York reported an uptick in consumers who expect to apply for vehicle financing during the next 12 months, but two economists, including Cox Automotive’s Tom Webb, discussed the potential headwinds that might arrive within the employment market as well as consumer confidence.
First, the New York Fed indicated its Survey of Consumer Expectations for June revealed that 12.9 percent of individuals expressed a likelihood of applying for auto financing within the upcoming year. That figure is up from 10.8 percent of individuals who told officials their intentions a year earlier.
However, the survey also showed that 26.5 percent of those consumers believed they likely would be rejected for that financing, up from 23.6 percent recorded in June of last year. What’s interesting is the New York Fed noted that its pool of respondents for the June survey contained more individuals with credit scores of 680 or below (15.8 percent) than the one a year earlier (8.3 percent). Also, consumers with sterling credit (scores of 760 and higher) made up the largest demographic in last year’s survey pool, constituting 14.4 percent a year ago but only 12.2 percent earlier this summer.
Then, Cox Automotive’s Webb revisited a topic he discusses regularly in order to give finance company executives some guidance on how the economy is behaving and how originations might develop.
In the July edition of the Manheim Consulting Auto Industry Brief, Webb acknowledged that a lack of productivity is dimming prospects for wage growth, which, of course, is a key component to vehicle affordability.
In 2014, Webb pointed out that the U.S. economy had a net increase of 3.1 million jobs, a rate that was the fastest pace in 15 years. Webb also mentioned an additional 1.25 million jobs were added in the first half of this year.
“And, of vital importance to the auto lending industry, initial jobless claims (adjusted for employment) are at an all-time low,” Webb said. “Yet, legitimate concerns about the robustness of the labor market remain.”
Although total employment is now 3.5 million higher than the previous peak reached in January 2008, Webb indicated full-time employment is still 822,000 shy of its all-time high.
“This partly explains the weakness in wage growth during the recovery,” he said. “But there is also a more troubling force holding down paychecks — productivity.”
After what Webb described as a “natural bounce back” coming out of the recession, Webb cited federal data that showed annual labor force productivity never exceeded 1 percent between 2011 and 2014.
And in the first quarter of this year, the Bureau of Labor Statistics (BLS) determined productivity was up only 0.3 percent from its year-ago level.
“The drivers of productivity growth are complex,” Webb said. “And, although policies to reverse the secular decline will be difficult to enact and slow-acting, they are the only way to promote real wage growth over the long term.
“Minimum wage laws, overtime pay regulations and guidelines for executive pay are all a sideshow,” Webb continued.
With wages evidently not on a significant upward track, the situation makes the monthly payment component of the vehicle installment contract all the most crucial to the completing of a contract. As Experian Automotive highlighted in the latest State of the Automotive Finance Market report, the average loan term for new and used vehicles originated during the first-quarter increased by one month, reaching new all-time highs of 67 and 62 months, respectively.
Then in an interview with Bloomberg earlier this month, former Santander Consumer USA chief executive officer Thomas Dundon maintained that rising contract terms aren’t necessarily bad for the industry, especially in the subprime space.
“The data would tell you that as long as the payment is affordable and quality of the vehicles is improving, the math says you’d rather give more term so the customer can get a better car,” Dundon told Bloomberg in this report, adding that 72-month contracts may soon be the standard term for prime contracts, too.
Equifax deputy chief economist Dennis Carlson didn’t disagree with Dundon’s thinking, especially when considering the BLS data that Webb referenced.
“The issue is the cost of cars absolutely has gone up. If you look at the price of a new car today versus five or six years ago, it’s certainly gone up faster than wages,” Carlson said.
“I think many people when they purchase a car, whether it’s new or used, they’re really looking at a number they can afford to pay on a monthly basis,” he continued. “If a car costs a certain amount and you’re able to pay X, then your loan is going to require you to reach terms that meet that number. One way we have been seeing that is through the prevalence of longer loans.
“I certainly think that it’s a factor, but I don’t know if it’s the driving factor,” Carlson went on to say. “I certainly would agree that as discretionary income continues to increase, as wages increase, perhaps those longer term loans will be less necessary. I think time will bear out the truth of that statement.”
Whether consumers take out vehicle notes that last 36 months, 72 months or even longer, the confidence in their finances, employment and more likely will impact what kind of financing they take — if any at all.
Stifel, Nicolaus & Co. Fixed Income chief economist Lindsey Piegza recapped the latest report from the Conference Board and Haver Analytics that showed consumer confidence fell from 99.8 to 90.9 in July, the lowest reading since September of last year.
In the details, Piegza noted consumers’ assessment of current conditions fell from 110.3 to 107.4, a three-month low. She added consumers’ expectations, meanwhile, plummeted nearly 13 points from 92.8 to 79.9, the weakest reading in more than a year.
“Consumer confidence was expected to decline slightly at the start of Q3. It was not, however, expected to plunge as it did in the latest report, falling to a multi-quarter low,” Piegza said in her latest economic commentary.
“Consumers are clearly losing confidence in a more robust outlook for the U.S. economy amid growing concerns over stagnant business conditions, fewer jobs and declining income,” she continued. “As consumers lose confidence, they are more likely to tighten their purse strings, further restraining household spending.”
Piegza recapped that June retail sales fell 0.3 percent compared to an anticipated rise of 0.3 percent.
“Coupled with downward revisions to the previous two months, the miss for retail spending in the second quarter totaled a full 1 percent,” she said.
“As a consumer based economy, without the consumer happy and healthy, we have little hope of stability, let alone momentum, as we head further into the second half of the year,” she went on to say.