A thousand dollars a month is a lot to pay for a car. But that’s what many American consumers are facing as interest rates rise and new and used vehicle prices remain stubbornly high.
It appears that consumers are beginning to buckle under the weight of rising finance costs, with car loan defaults on the rise. That’s a “canary in the coal mine” for the American consumer and the broader American economy, warns Wolfe Research chief investment strategist Chris Senyek.
Delinquencies at auto lender and bank Ally Financial (ticker: ALLY ) ended 2022 with 3.56% of auto loans more than 30 days delinquent, up from 2.14% in previous year The fourth quarter figure was close to the peak of 3.61% 30-day delinquencies reached in the last three months of 2019.
These defaults could be just the start of a bigger slump for consumers and trouble for auto stocks.
Senyek sees problems for consumers following the slowdown in activity elsewhere in the economy. For example, housing starts in the United States are down 25% from recent highs. Bitcoin is down almost 50% in the last year. Google Alphabet ( GOOGL ), Amazon.com ( AMZN ) and Microsoft ( MSFT ) have experienced a slowdown in cloud computing. And US manufacturing activity has been contracting for four consecutive months.
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“We believe the US economy is experiencing a series of ongoing recessions,” Senyek said in a research note on Wednesday. For that reason, he doesn’t like consumer discretionary stocks, which include shares of automakers like General Motors (ticker: GM ), Ford Motor ( F ) and Tesla ( TSLA ).
The reason why consumers struggle with auto loans is not hard to figure out. New car prices are near record highs. And while used vehicle prices are below their peaks, they remain roughly 50% above pre-pandemic levels.
The upshot: More than 15 percent of consumers who financed a vehicle in the fourth quarter are paying more than $1,000 a month on their car loan, according to automotive data provider Edmunds. This is the highest percentage ever.
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Senyek says the pressure that is leading to higher auto loan defaults will put pressure on consumer spending, which will affect the entire economy.
“Our sense remains that US real consumption growth will significantly disappoint in the strongest Fed tightening cycle in over 40 years,” adds Senyek. “The recent spike in auto and subprime delinquencies is a worrisome early warning sign.”
The struggles for car buyers and owners likely won’t end anytime soon, as interest rates on new and used car loans are on the rise. The average interest rate on a used car loan is close to 14%, according to automotive data provider Cox Automotive. The average interest rate on a new car loan is now around 8%.
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It remains to be seen how auto loan trends will play out. New and used car prices could drop, easing some of the stress on consumers. Or rising finance costs could affect demand for new and used vehicles.
Meanwhile, some of the headwinds have already been reflected in the shares and earnings estimates of Ford and General Motors.
Either of these results would be a headwind for auto stocks. Tesla might feel a little less pain, because its average car costs more than $50,000 and luxury car buyers feel less stress. They are financing fewer cars and only buying them outright, according to data from Edmunds.
Wall Street expects Ford to generate about $9.1 billion in operating profit in 2023, down from $10.4 billion generated in 2022. Analysts forecast operating profit of $11.3 billion for GM in 2023, down from $14.5 billion of dollars generated in 2022.
Ford shares are down about 25% over the past 12 months, while GM is down about 13%. The
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they have dropped by 8% and 2%, respectively, in the same period.
Share price declines have left these automakers’ shares looking cheap: Ford stock is trading at around 8 times estimated 2023 earnings and GM stock at around 6.4 times. But investors may not see current prices as an opportunity to pick up that car stock at a discount until they get a better idea of how the U.S. consumer will handle its financing headwinds.
As for Senyek, he thinks it’s safer to play defense in areas like consumer staples.
Write to Al Root at allen.root@dowjones.com
