Often used as a strong indicator of a healthy consumer economy, declining auto sales are an early warning sign for economist and businesses hoping to forecast our unpredictable economic future.
This is the biggest drop since May 2011 and the lowest amount of sales throughout a month in over five years.
This is not only true within the United States, but is in fact a similar story that is unfolding all across the globe. Pointing to a much wider problem within the industry.
However, I believe that there is more to this story than first meets the eye.
Although declining auto sales are indeed a bad sign for the economy in general, what is being missed by many is the fact that these declining auto sales directly align with rapidly rising average car prices.
The average car price in the United States is expected to hit $33,319 by the end of the first quarter, a $1000 increase over the same time last year.
This comes on the back of years of rapidly rising car prices, while the average income of consumers has been relatively stagnant.
So how are manufacturers doing this? How are they demanding higher and higher prices and why in the world would anyone pay these outrageous prices for a new vehicle?
The reason for this is similar to the 2008 crisis, as lenders are already forgetting the follies of their recent past.
People are leveraging higher and higher as lenders extend the average length of their loans, while at the same time reducing their standards.
In the not too distant past, car loans were a maximum of five years. Now, that number has increased from six years, to a stunning seven years!
Depending on where you live this means that your car could be a hunk of junk by the end of your term, while you are still paying the large monthly payments that you began your loan cycle with.
This stretching out of the length of the loan does not result in lower monthly payments for you the consumer, no, not at all.
All this allows is for dealerships to charge the same monthly payment that you were accustomed to during the five year term, but for seven years instead.
This is akin to a slow boil inflation, such as keeping a bag of chips the same dimensions, while at the same time reducing its contents and it is now beginning to backfire on those who orchestrated it, as people are taking notice and voting with their feet.
Still, even though people are waking up to the shyst that was pulled on them, this does not mean that serious ramifications may not result because of this.
If we do enter into a serious recession, something that I do see coming over the next few years, then we may witness massive defaults on loans that people are simply unwilling to pay and would rather walk away from.
Car loans are not as sacred as home loans. People are much more willing to simply throw their hands up in the air in disgust and let the Repo man take their car, especially if it means they get to protect their home and other assets.
This could cause a rapidly spreading contagion among the auto lenders who have over-leveraged themselves with these horrible loans, threatening to bring the entire banking sector to its knees just as we witnessed throughout the 2008 crisis, once again increasing the need for a precious metals "insurance policy".
Regardless of the outcome, I highly suspect that we are going to see a swing back towards correction as auto manufacturers are forced to lower their prices, which is going to be a tough pill to swallow for them indeed.
- Source, Sprott Money Blog