The auto industry is one of the few booming sectors of the U.S. economy with vehicle sales at a 15-year high, according to The Wall Street Journal. Another publication, Car and Driver, even proclaimed 2015: “The Best Year Ever for U.S. Auto Sales.”
Analysts credited a perfect storm of low fuel prices and low interest rates for the record sales. Americans spent around $570 billion (€509.86 billion) to purchase 17.5 million vehicles in 2015, which allowed one automaker, Ford (NYSE: F), to see its revenues grow from $145.18 billion (€129.86 billion) in September 2015 to $149.56 billion (€133.78 billion) in December 2015. That’s an increase of $4.38 billion (€3.92 billion) in just one quarter.
What’s truly interesting is that this incredible revenue growth has not helped Ford’s stock; it was trading at $13.03 (€11.66) a share on March 24, 2016. It seems as if investors could be right: American car sales are a bubble that could collapse at any minute.
Are U.S. Auto Sales in a Bubble?
Disturbingly, a number of knowledgeable people, including some auto industry insiders, seem to think that U.S. auto sales are a bubble that could collapse at any minute.
Ford could remain profitable; even auto sales fell by 30%, and the company could break even financially if sales fell by 37%, the company’s Chief Financial Officer, Bob Shanks, told analysts on March 21. Bloomberg reported that Shanks thinks Ford could easily cut its costs by $3 billion (€2.68 billion).
It sounds as if Shanks thinks that a sudden drop in U.S. car sales could occur at any time. He didn’t say such a drop would happen, but it sounds as if Shanks thinks it is possible.
Nor is Shanks alone. Mike Jackson, the CEO of AutoNation (NYSE: AN), America’s largest operator of car dealerships, thinks the current vehicle sales volume is not sustainable. Jackson told Auto News that he thinks the sales volume is being sustained by dealer incentives and leasing deals, rather than an increased demand for new vehicles.
Around 30% of vehicles sold in the United States are leased, and dealer incentive spending has increased by 14% over the past year, Jackson said. Similar sentiments were expressed at the J.D. Power Automotive Forum at the New York International Auto Show on March 23, USA Today reported.
Five Signs that the American Auto Bubble is about to Burst
According to J.D. Power, there are five warning signs that indicate the auto bubble is about to burst, and they are:
1. Negative Equity – The number of drivers who are underwater in their car loans or owe more than what the vehicle is worth will hit a 10-year high in 2016. According to J.D. Power, around 31.4% of U.S. auto loans, or nearly one third, are now underwater.
2. The level of subprime auto loans, that is money lent to people with low incomes or bad credit, is increasing. That level could reach 17.5% in 2016, the highest level since 2006.
3. The demand for automobiles is falling because people are less interested in driving and vehicles. A study by the University of Michigan found that just 76.7% of Americans between the ages of 20 and 24, or nearly one in four, did not have a driver’s license in 2014. As recently as 2008, the percentage was 82%. To make matters worse, only 69% of 19-year-old Americans held a driver’s license in 2014; the percentage was 90%. The same survey found that older Americans are also driving less; the percentages of Americans in their 30s and 40s that held driver’s licenses were also down.
4. A large percentage of the auto sales are fleet sales to large companies, government agencies, taxi services, and car rental agencies. Such sales are less profitable, although they are more reliable. A growing disruptive factor here is the increasing number of sales and leases to car sharing or networked transportation companies, such as Uber.
5. The length of auto loans is growing. The average auto loan is now 72 months long in the U.S., a sure sign that dealers and finance companies are lowering payment amounts in order to increase sales. It also indicates that a growing number of people are having a difficult time meeting a monthly auto payment.
The underlying factors of these trends are not that hard to ascertain. A major one is falling income; polling firm Pew Social Trends calculated that the median income of a middle class household in the United States in 2014 was 4% less than it was in 2000. The median wealth of a middle class American household fell by 28% between 2001 and 2013.
This means that people have less money for car payments and more Americans have to result to subprime lending or long-term loans just to buy a vehicle. There are also more Americans that simply cannot afford a new vehicle; around 20% of the U.S. population is in the lowest income tier, which means more Americans are too poor to afford a car.
This indicates that the U.S. auto industry could soon face a meltdown like the subprime mortgage bubble of 2007. If the economy were to suddenly collapse, the industry could be faced with millions, or even tens of millions, of unpaid auto loans.
Some other long-term trends are even more worrying for vehicle companies. Many middle class Americans are driving less because of the popularity of online shopping and delivery, the ease of using ride-sharing services like Uber, and better public transportation.
The Next Big Economic Crisis
An increasing percentage of them are also going without cars, a trend that has prompted both Ford and its historic rival, General Motors (NYSE: GM), to invest in networked transportation technologies. General Motors even purchased the assets of the defunct networked transportation service Sidecar.
It looks as if the U.S. auto industry could be on very shaky ground. That should worry observers because it is one of the engines driving the U.S. economic recovery and it is even boosting Germany’s economic success. U.S. automakers purchased one out of every two industrial robots sold in the world, according to the International Federation of Robotics.
Investors and others should pay close attention to U.S. auto sales. Their collapse could be the beginning of the next big economic crisis.