A Tale of Two Consumers
An investigation into the recent uptick in auto-loan delinquencies.
Like a deer in the woods scanning for danger, we’ve been nervously stressing about the impending recession. We’re primed for flight with tense reflexive muscle memory tuned-in to respond to the faintest crack or pop. We just heard one and our Spidey sense tingles. Auto loan delinquencies are up, and now they’re higher then the peak reached during the Great Financial Crisis (GFC).
Recent data produced by S&P Global suggest that 1.69% of auto loans today are delinquent by more than 60 days. While this may be good news for the repo man, its not a welcome bit of information for the broader economy. But not all twigs that snap in the woods are signs of a bear.
There’s a difference between the number of loans delinquent and the total balance of loans that are delinquent. The second figure matters more because it represents the total amount of capital at risk. The total balance of delinquent loans peaked in 2010 and again in Q1 2020 and seems to be declining. S&P Global reports in its recent PRNewswire that the pickup in delinquencies is concentrated almost entirely in the sub-prime auto loan segment. Keep in mind, sub-prime auto loans typically carry a smaller average balance.
Surprisingly, the total balance of auto loan delinquencies during the GFC peaked at just over 5% whereas mortgages peaked at over 9%, meaning people prioritized timely auto loan payments over mortgage payments. By association, we’re conditioned to think auto loan delinquencies were just as bad during the GFC but they were not. Understanding this nuance is important when processing what seems to be an alarming headline.
This is how we get a situation where the number of auto loans moving into delinquency status is climbing while the total balance seems to be moving down. Last July, Costco CEO Craig Jelinek commented on CNBC’s Squawk on the Street that they were seeing recessionary behavior from a portion of their club members while others remained in a growth pattern. The behavior seemed to be closely related to household income. The trend appears to be continuing several months later, now showing up in the auto loan data.
The negative impact of inflation is felt more acutely by those households with lower incomes. As the price of necessary goods and services rises, this leaves less left over to save, which only exacerbates the problem. Living paycheck to paycheck, it’s difficult to make loan payments on time and the choice between eating and paying creditors is as easy as choosing between a Snickers bar and licorice. As inflation problem grows, so does the discontent of those who suffer from it.
Recent surveys conducted by CNBC, Lending Club and Lending Tree suggest that between 58 – 66% of Americans live paycheck to paycheck. This also means that just 1/3rd of Americans have either benefited from or remain unaffected by the inflationary conditions. Inflation generally benefits those who own assets. The result is an accelerating bifurcation of wealth, dividing the haves and the have-nots.
Whether this will reach a breaking point is anyone’s guess. The “2/3rds of Americans live paycheck to paycheck” message goes back as long as I’ve been alive. For now, the economy is still growing and a large segment of Americans are doing better than ever, happy to take on the exorbitant payment for a fancy new ride.
While conditions can change quickly, asset ownership is likely to never go out of style and inflation is constant. My advice: show up to work, save at least 15% of your income, and ignore most of the snapping twigs. If it ends up being a bear, remember you’re a resourceful human and not a skittish deer. Owning assets with a low debt to income ratio is like having a can of bear spray with a 30-06 by your side.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Securities offered through LPL Financial LLC. Member FINRA/SIPC. Advisory Services offered by National Wealth Management Group LLC, an SEC Registered Investment Advisory and separate entity from LPL Financial LLC.