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In One Chart - June 11, 2019

In One Chart: US Auto Sales Are Running on Empty

US auto sales are a real beater, and tariffs on Mexican imports are like the “check engine” light incessantly blinking.

President Trump walked back tariff threats against Mexico after an immigration agreement with the United States was met, but Trump warned that tariffs can still be enacted if Mexico’s legislative body doesn’t approve the deal.

While this particular tariff campaign seems to be shored up, the US Auto industry, with its significant Mexican exposure, is still holding its breath.

For example, RBC analysts estimate that 28% of General Motor’s (GM) North American production takes place south of the border; that metric is 10% for Ford (F). Additionally, Deutsche Bank estimates that car and car-parts manufacturers were responsible for $93 billion of the $350 billion of imports from Mexico last year, more than any other U.S. industry.

The chart below shows US Auto SalesUS Automobile Imports from Mexico, and US Auto Loan Debt since the start of 2010; noteworthy is that despite the decline in sales since 2015, loans have continued to trend upward.

Click to view in YCharts

The US-Mexico tariff situation is just another line item on auto makers’ growing list of concerns. At the top of that list? Slowing sales; and Deutsche Bank also estimated that if enacted, tariffs could cause U.S. consumers to buy 18% fewer vehicles over a year.

The “Big Three” auto manufacturers all reported Q1 2019 revenues that were lower than in 2018:

As automakers have changed from volume-focused strategies to profit-focused, expecting a positive impact from more expensive trucks and SUVs, experts claim that rising prices and increases to both loan size and rates are negatively impacting the industry.

If auto sales are the beater, then auto loan debt is growing like spreading rust.

The average amount borrowed to purchase a new vehicle hit a record $32,187 in the first quarter of 2019, according to Experian, which tracks millions of auto loans each month. For used-vehicle loans, that number is $20,137, also a record. That translates to average monthly payments of $554 for new cars and $391 for used, according to Experian.

Additionally, a record number of car buyers, 61.8% of those with prime credit ratings, are taking out loans to buy used vehicles, reflective of both lower interest rates and higher prices. Experian’s Melinda Zabritski stated that “we have not seen a slowdown in loan demand. In fact, volume for new and used loans is up from previous years.”

What does this mean for investors and consumers? Be careful.

Even with quality creditors borrowing at record rates, the New York Fed is concerned by broader credit deterioration as the number of car owners 90 days or more late on their loans rose from 2.29% to 2.36% in the first quarter, year-over-year.

The decrease in auto sales and the concurrent increase in outstanding auto loans are at an obvious disconnect, putting the future of the industry in question. Will automakers’ profit-oriented strategy overcome declining volume, or will low-income buyers be priced out of the market?

With tariffs on Mexico resulting in an estimated 18% fewer vehicles sold through 2019, investors should make sure that “check engine” light goes out by monitoring the ongoing United States-Mexico tariff situation closely.

Just like a 3,000 mile oil change, evaluating corporate earnings over the coming quarters will indicate the health of the auto industry, and investors should pay close attention to developing trends surrounding revenue, volume, and sales prices.

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