The auto loan bubble is now hitting consumer spending…

From Justin Dove, Editor, The Crux:

The $1 trillion debt bubble in the auto sector is beginning to drag consumer spending… and could be pulling the U.S. economy into recession.

Regular readers are surely familiar with our coverage of the massive subprime bubble in automobiles. (Catch up here.)

Porter Stansberry recently summarized the situation well:

The average new car price (about $35,000) is the highest price ever. Compared with average wages (about $50,000), cars are vastly more expensive than ever before. So how have Americans been driving record numbers of new cars? Two ways: leases and very easy credit policies.

Since 2014, we’ve been warning that auto-lending standards were far too loose and that rising defaults would sooner or later greatly reduce demand for new vehicles (and wreck the balance sheets of auto lenders). Were we right?

The value of auto loans that are at least 30 days in default currently totals $23 billion – up 14% in just the last year. And since 2014, the leading independent auto lender, Santander Consumer USA (SC), has seen its stock fall in half. I believe it will soon fall in half again… Off-lease used-car supply has doubled since 2012 and will continue to increase by another 25% over the next two years. Banking giant Morgan Stanley believes this will cause a 50% drop in used-car prices.

With used car prices falling and automakers slashing projections, there’s no question the auto industry is rolling over. But now, we are starting to see its effect on the broad economy. As Business Insider reported today (emphasis ours):

Real personal consumption grew by just 0.3% in the first quarter, down from an increase of 3.5% in the fourth quarter of 2016. It’s the smallest increase since Q4 2009, just two quarters removed from the recession.

According to Ward McCarthy, the chief financial economist at Jefferies, this dragged down growth.

“Q1 PCE rose a modest 0.3% and contributed a scant 0.23 percentage points to growth,” McCarthy said in a note after the release. “The US is still very much a consumer-driven economy, and the consequences of a quarter when consumer spending slows are clearly reflected in headline GDP growth. Had PCE made the average contribution to growth, Q1 headline GDP growth would have been 2%.”

The significant spending drop came from a drag in two key areas, according to TD Securities’ Brittany Baumann.

Reduced spending on motor vehicles led to a contraction in durable goods expenditures (-2.5%), while seasonably warm temperatures hit spending on utilities, contributed to a weak spending on services (0.4%),” Baumann said in a note.

Oddly enough, it doesn’t appear to be because Americans are getting paid less. The employment cost index, a measure of the costs of wages and benefits to American labor, hit 0.8% in the first quarter, its highest reading since Q1 2008.

However, Bill Bonner reported that tax receipts were, in fact, down for the fourth straight month last month… along with a slew of other sign the economy is slowing:

Factory output dropped the most since last August, led by declining auto sales.

Meanwhile, housing starts are at a four-month low. Bank loans are slipping. Commercial property is “rolling over.” Consumers have tapped out. And the Fed’s GDP growth estimates are getting lower and lower.

But the biggest deal is that tax receipts are down, year over year, for the fourth month in a row. Taxes are real money. They’re not fake news like unemployment and inflation statistics.

When people earn less, they pass less in taxes. A decline in tax receipts means that something real is happening in the economy.

The last time tax receipts fell like this was in 2008. You know what happened next.

And that’s not the only indicator reaching 2008 bubble levels. As Bill reported last week:

Household debt is once again at more than $14 trillion – the level that set off the crisis of 2008–’09. At that level, consumers have a hard time spending.

It would appear that consumers may be starting to get tapped out in debt. And a big reason is the explosion of more than $1 trillion in auto loans. People can only take on so much debt before they can’t spend anymore

The Fed’s latest credit bubble may be close to popping.

Stay tuned…


Justin Dove

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