Bloomberg just published a piece explaining why the post-Great Recession U.S. auto sales boom is coming to an end:
Carmakers have enjoyed an extended run of near-record U.S. sales and fat profits. But this year, it looks as if the party really will start to end.
Interest rates are on the rise. The average price of a new vehicle has hit record levels, which is pushing some buyers out of the market. And don’t let the surprise squeaker of a 2018 sales gain fool you: Automakers kept the numbers up partly by selling more cars to rental companies.
On top of that, President Donald Trump’s tax cut helped support demand in 2018, especially for corporate buyers who added to their fleets. But a fourth-quarter decline at General Motors (NYSE:GM) shows the boost could be a sugar rush that won’t last long.
The biggest U.S. automaker’s deliveries fell at a faster rate in the last three months of the year than for all of 2018, suggesting demand is weakening, said Charlie Chesbrough, senior economist at Cox Automotive, which is forecasting sales to slow further in 2019. “For some automakers, the slowdown has already begun,” he said.
I agree with the Bloomberg writers’ arguments, but I also wanted to point out that U.S. auto sales have been bolstered by a bubble in auto loans, which is a byproduct of the ultra-low interest rate environment of the past decade. Since 2010, total outstanding U.S. auto loans increased by $445 billion or 64% to over $1.1 trillion.
After the Great Recession in 2008 and 2009, the U.S. Federal Reserve cut interest rates to record low levels and held them there for a record length of time, making it much cheaper to take out loans of all kinds. Notice how the total outstanding U.S. auto loans in the chart above start to soar shortly after interest rates were cut to record lows (based on the chart below)?
That is certainly no coincidence. Low interest rates lead to borrowing booms that end when interest rates go back up, which is what has been happening over the last few years. Rising interest rates are threatening the U.S. automobile sales and loan bubble and will eventually cause its popping.