Carmageddon: Record Incentives And Financing Terms Fail To Stem The Auto Bleeding In June

Yesterday we noted that auto investors celebrated the fact that, while auto sales were down massively year-over-year (to the tune of nearly 6% for the Detroit 3), June figures were "less bad" than expected, so "good".  All of which sparked even more "irrational exuberance" among OEM equity owners and sent Ford/GM shares soaring. 

But, rather than focus on the headline numbers, perhaps those equity owners should spend a little more time analyzing the record incentives and deteriorating underwriting standards that have been required to generate those "less bad" results.

Take, for example, incentive spending for the month of June.  As Automotive News points out, overall industry incentive spending soared nearly 10% YoY with brands like Hyundai and Honda slashing 42% and 20%, respectively, to move their bloated dealer inventories.

ALG reports automakers spent an average of $3,550 per new vehicle sold in June, up 9.7 percent from a year ago. The average discount is expected to account for 10.8 percent of the average transaction price of vehicles sold last month -- marking the 11th time in the past year that incentive spending has accounted for 10 percent or more of the sale price, according to industry forecasters.

Autodata Corp. says average incentive spending heading into June was up 15 percent to $3,516 per vehicle sold. Despite weakening demand for cars, incentive spending for light-duty truck increased 16 percent compared to 13 percent for light-duty passenger cars during the first five months of the year.

American automakers, which continue to offer the most cash on the hood, matched the industry average for incentive spending, up 14 percent through May, while average discounts at Asian brands increased 19 percent and deals at European automakers rose only 3.9 percent.

ALG reported Subaru, Hyundai and Kia experienced the largest increases in incentive spending in June compared with a year ago. Average discounts at Subaru -- the lowest spender in the industry -- increased 63 percent to $1,032; followed by Hyundai, rising 42 percent to $3,259; and Kia, with an increase of 25 percent to $3,384.

Meanwhile, Edmunds notes that auto loan terms continue to get stretched out to record new highs each month all in an effort to continually lower monthly payments so that entitled Americans can buy cars they really can"t afford.

Edmunds analysts found that the average loan term for new vehicles soared to a record high of 69.3 months in June, an increase of 1 percent from June 2016 and up 6.8 percent from five years ago. In addition, the average amount financed by new-car buyers jumped to $30,945, which is a 2.6 percent increase from this time last year and 17.2 percent more than five years ago. And the average monthly car payment is now $517: That"s 2.1 percent more than in June 2016 and an 11.3 percent increase over five years.

"Stretching out loan terms to secure a monthly payment they"re comfortable with is becoming buyers" go-to way to get the cars they want, equipped the way they want them," said Jessica Caldwell, executive director of industry analysis for Edmunds. "It"s financially risky, leaving borrowers exposed to being upside down on their vehicles for a large chunk of their loans, but it"s also a sign that consumers are still confident enough in the economy to spend more on their vehicles and commit to paying for them longer."

And it"s not just new car loans as used car terms are getting stretched out as well...a fact that we"re sure will serve consumers well if Morgan Stanley"s downside case for used car prices ever actually plays out (see "Morgan Stanley: Used Car Prices May Crash 50%").

Consumers in the market for a used vehicle are also willing to stretch their payments. An Edmunds analysis found that the average loan length for a used car is now 66.9 months, up 0.1 percent from June 2016 and up 6 percent than five years ago. The average amount financed has risen to $21,142, a 0.4 percent jump from last year and an increase of 9.9 percent over five years. And the average used-car payment in June was $383, which is 0.8 percent more than a year ago and up 3.5 percent from five years ago.

And don"t even get us started on the record level of "channel stuffing" going on the industry...

...with GM being the biggest culprit with inventory days up a modest 46% YoY to an all new record high of 105 days.

???? GM"s inventory has officially hit a 10-year high. 980,454 units in stock (a 105-day supply) as of June 30, the most since June 2007.

— Nick Bunkley (@nickbunkley) July 3, 2017

Finally, as Stone McCarthy Research points out, Americans, flush with their $0 down, 0% interest for 84 month auto loans, continued to shun cars for much more expensive, and profitable, trucks and SUV"s.  Another "positive" for the industry...if you manage to ignore those record incentives we mentioned above which are eroding away all that extra profit.

General Motors domestic car sales came in much lower than we expected, and declined nearly 34% from June 2016. Their domestic light truck sales were much stronger than we expected, and were up over 7% from last year.

Domestic car sales were weaker than expected for Ford as well, and fell 23% from last year. Ford domestic light truck sales also came in below our expectations, though were not weak as ford domestic car sales, and were only up about 6% from June 2016.

Chrysler domestic light car sales came in right where we expected, down 19% from last year. Domestic light truck sales for Chrysler were below our expectations though, and fell around 3% from last year.

Car sales:

Truck sales:

Of course, things like math and critical thought are way more complicated than quickly reacting to "less bad" headlines.  That said, in the long run, math and logic tend to prevail.

 

Trump Thinks Your Car's Gas Mileage Is... Your Business

Via Eric Peters Autos,

The Clovers are aghast that Trump is threatening to do the unimaginable – and stop threatening the car companies with federal fuel economy fatwas (and add-on fatwas forbidding or restricting how much plant food – carbon dioxide – cars may emit).

He appears to be entertaining the horrible idea that the people who buy cars ought to be free to decide for themselves how much fuel economy matters to them – since they will be the ones paying for both the car and the gas. And – oh my god! – that this is really none of the business of the “concerned” scientists and other professional busybodies who regard their opinions and preferences as holy writ enforceable at gunpoint.

“We’re going to work on the CAFE standards so you can make cars in America again,” said Trump. He should have added the qualifier – affordable cars in America again.

Leaving aside the moral issue – who are these people to tell anyone whether their next car should get 10 MPG or 40 MPG? – the issue never addressed by the media, including the automotive media, is how much will all this cost us?

Obama’s mullahs uluated about the many billions (allegedly) which would be “saved” by force-marching every automaker to build cars that average 54.5 MPG. It is the sort of “savings” one realizes by emptying your bank account to buy something you don’t need that’s 5 percent off.

Only worse, because you’re not given the option to keep your money in the bank.

A week or so ago, executives from the major automakers came to the White House to explain to Donald – who probably already grokked it – that to get a single car to average 54.5 MPG requires more than merely ululating that it will be so. A new Prius hybrid almost manages it – and the hybrid Prius costs several thousand dollars more than an otherwise similar but not 54.5 MPG non-hybrid car.

And to get every car made to average 54.5 MPG – which is what Obama’s EPA ululated in the last weeks of his regime – won’t magically just happen, either – even if the entire regulatory Mecca ululates in unison for a week straight.

In the first place, it requires technology – and new designs. These generally involve work and resources, which cost money. New components don’t generally rain from Allah’s merciful bounty, upon ululation.

The executives pointed this out to Trump – who almost certainly grokked it beforehand, since he appears to be a man who probably knows where the dipstick is under the hood of a car and also what it’s for.

It is doubtful Obama knew – or did.

Or cared.

The current CAFE fatwa is 35.5 MPG and to achieve this without going hybrid across the board has required some very elaborate – some very expensive – technology. Two specific examples: Direct injection and transmissions with eight, nine and lately ten forward speeds.

These are coming online (the new Ford F-150 pick-up, reviewed here,  has a ten-speed automatic and probably two-thirds of all new vehicles are already direct-injected) because of the existing CAFE fatwa.

But they offer no particular advantage to the buyer, in terms of how the car drives or performs. Indeed, cars with these too-many-speeds automatics often have strange driving characteristics.  I can vouch for this; I test drive and review new cars each week.

For instance, the sensation that the car is surging forward (it is) when the transmission skips up three or four gears on a downhill because the computer is desperate to get the transmission into the top overdrive gear as quickly as possible in order to cut engine revs to the minimum in order to squeeze out a teensy uptick in MPGs, for the sake of CAFE.

Direct injection, meanwhile, has supplanted port fuel injection (PFI) with a two-stage system that operates at extreme pressure (3,000 psi vs. 35 or so psi) and which has created a carbon deposit problem inside the engine. In engines fed fuel via PFI or TBI or even a carburetor, the fuel washes over the backsides of the valves as it enters the combustion chamber – and because gas is a solvent, that action keeps the valves from crudding up. But in a DI system, the fuel is sprayed through a hole inside the combustion chamber and there is no solvent effect.

And so, crud forms.

To fix this problem the automakers are adding a separate, additional port-fuel circuit to keep the valves clean. So now you car will have two fuel injection systems – and multiple fuel pumps rather than just one.

It is not free.

What would it take to get all cars to average 54.5 MPG?

Keep in mind that not a single non-hybrid/non-electric new car comes close to that. Obama’s fatwa was in a way an ululation demanding that most if not all cars be hybrids or electric cars – because that is probably the only way to get to a “fleet average” (CAFE terminology) of 54.5 MPG absent the discovery of miracle technologies such as Roswell Crash-style ultra-light metal that is also ultra strong (so that other fatwas regarding “safety” can also be complied with).

This brings us back to the moral issue: Why is how much or little fuel our cars use anyone else’s business, since we pay for the car and the fuel? If gas “costs too much,” we can buy a different car that uses less.

And there is another issue, very obvious, but – like the cost of the fatwas – never asked or discussed:

If the market is so “concerned” about fuel economy – as the various scientists, “public citizens” and other such self-appointed voxxers of the populi claim, why not allow the market to apply the pressure?

Can’t have that. Pressure must come from above.

It doesn’t matter that there are already cars available that were designed to deliver much higher-than-average mileage – the Prius, for instance – which people are free to pay for if that is their priority. What the various “concerned” and the mullahs within the EPA and federal apparat are really concerned about is that people can choose not to buy such. That they are free to buy something else.

For the ululators, everyone must buy the same thing – the thing the uluators insist they buy. Or else.

Always, collectivism and coercion.

Never free choice, liberty – the market.

It’s worth recalling that the literal translation of laissez-faire is… leave us alone.

Exactly.

Good on Donald.

"Stealth Recession" - The Mystery Of The Teleporting Commuter

Via ConvergEx"s Nicholas Colas,

The game is afoot: call it the “Mystery of the Teleporting Commuter”.  Starting in October 2016, the amount of gasoline supplied to the US market started to decline on a year over year basis.  This negative trend accelerated in January, leaving both energy analysts and macroeconomic pundits to wonder if the US has entered a stealth recession.

We regularly look at US gasoline production in relation to the Department of Transportation’s “Miles Driven” data, and when you add that variable to the mix the mystery starts to clear.  Even though gasoline supplied was down 1.6% in October and -0.3% in November, the DOT data (November last month available) shows miles driven up 1.6% and 4.3%, respectively.  By this math, imputed fuel efficiency for the US fleet is improving noticeably compared to historical trends that date back to the 1970s – a trend that is worth watching in 2017.

And while that’s an important piece of the puzzle, the real upshot is the gasoline data alone is not enough to conclude that the US economy has grabbed a lower gear or slipped into reverse.  The miles driven data shows we can (and probably are) still cruising along.

Are you an American male between the ages of 35-54?  If so, congratulations (of a sort).  According to the US Department of Transportation’s Federal Highway Administration you drive more than any other age cohort/gender demographic.  A lot more, as it turns out: you clock an average of 18,858 miles/year, some 14% more than the national average of 16,550 miles/year.  The group least likely to get behind the wheel:  women over the age of 65, who drive an average of 4,785 miles/year.  If you are in neither camp, you can see how your demographic stacks up here: https://www.fhwa.dot.gov/ohim/onh00/bar8.htm

Regardless of where you are on that continuum, Americans do a lot of driving.  In fact, over the last 12 months ending November 2016, we put a collective 3,215 billion miles on the odometer.  That is the equivalent of driving back and forth to the Sun every 3 weeks.  And since most Americans (86% according to a 2009 Census study) commute to work alone in their car, taking an average of 25 minutes door-to-door, driving is closely correlated with employment levels.  All those miles behind the wheel are therefore an important economic indicator.

It is for this reason that a Goldman Sachs note out this week about the decline of gasoline supplied to the US market caught a lot of attention.  Less gas consumption should, logically, mean fewer people doing the daily commute.  Not to mention shopping, going out to eat, and everything else Americans like to do.

The upshot is this: implied gasoline supply to the US based on data from the EIA was down 5.2% in January.  These are levels consistent with a recession, even though Goldman is careful to point out that they don’t expect one is in the works.  So what’s going on?

There is another data set to consider: the Department of Transportation’s “Traffic Volume Trends”, which estimates the total miles driven on American roads through 4,900 sensors placed on both rural and urban arterial roads.  Squaring that information against the gasoline supplied data from the EIA yields some useful observations:

• Gasoline supplied – the number everyone is worried about – has actually been declining on a year over year basis since October 2016. The comps are: October (-1.6%), November (-0.3%), and December (-2.4%).  We use the EIA’s monthly data, which is less noisy than the weekly data that is getting all the attention, so January 2017 is not available yet.


• The DOT’s “Miles Driven” data tells a different story. October 2016 miles driven were up 1.6%, and November’s comp to prior year was +4.3%. You can see all the data on the DOT website here: https://www.fhwa.dot.gov/policyinformation/travel_monitoring/tvt.cfm.   Given that the National Retail Federation estimated Holiday 2016 at a 4% comparison and employment growth was positive in the month, we doubt miles driven in December 2016 was lower than the same month in 2015.


• Put the two items together, and you get a noticeable increase in implied fuel economy for the US fleet over the last 120 days. We’ve tracked this statistic back to 1973, and average US fleet miles per gallon has in fact been increasing gently over the years.  It now sits at 23 MPG, where it was just 13 MPG back in the 1970s.  The increase comes from Federal regulation of Corporate Average Fuel Economy, which requires auto manufacturers to sell a product mix with a specific miles per gallon goal.  CAFE standards have risen over the years, resulting in better average economy.

Long term trends to better fuel economy aside, the recent drop in gasoline consumption alongside ever-greater “Miles driven” is a notable trend to follow in the coming months.  The US vehicle fleet (cars, pickups, minivans, SUVs, etc.) totals over 250 million units, and (at most) 17 million clunkers scrap out every year, to be replaced with 17 million new (more efficient) vehicles.  Now, we have had several years of very good vehicle sales during a time when CAFE requirements were rising quickly.  Incremental fuel efficiency is therefore certainly a part of the story.  As for how much, we will have to monitor the data through 2017 to see how this develops.

The bottom line, however, is that the gasoline supply data is only part of the story, and the DOT statistics tell the rest.  Miles driven can climb even when gasoline shipments decline.  It happened as recently as Q4 2016.  It probably happened in January 2017.  Sure, there will be a recession at some point.  But it probably didn’t start in January.