Mainstream media reports have been touting increases in auto sales as evidence that the economy is gaining steam. Indeed, consumer demand for new cars and trucks is widely viewed as a measure of broad confidence in the economy. A major AP story even added, “The government shutdown dampened — but didn’t stall — Americans’ demand for new cars and trucks.” Did they really expect the temporary partial government shutdown to halt all private economic activity? And how do they really know what effect—if any—the shutdown had on auto sales?
They’re not telling the entire story. While auto sales increased last quarter, this should not come as a surprise. Sales have been soft since the recession began, but the age of the average car on the road today has risen to 11 years. Pent up demand, low interest rates and model year clearances converged to lift sales. It was bound to happen sooner or later.
But there’s another factor at work here. People are stretching out their car loans more than ever. According to Experian, long term loans (73-84 months) increased to 25% of the total, while short term loans (25-36 months) decreased to 25% of the total. Put another way, many Americans saddled with older vehicles are starting to trade them in, but they are stretching out their payments over a longer period of time.
This trend also creates a potential problem down the road. With longer term loans, Americans will be building less equity in their vehicles and won’t be as likely to replace them in the near future. This doesn’t bode well for auto sales over the next decade. Less equity also puts buyers at risk of delinquency and repossession.
While economic activity is always welcome, this is hardly a sign of a reviving economy. It’s merely part of the predictable ebbs and flows of the auto business. We will be making progress when employers begin hiring more full time workers. Unfortunately, this just isn’t happening now.