Could Cars Cause A Crash?

Could Cars Cause A Crash?

over 4 years ago2 mins

It’s no secret that an unprecedented nationwide drop in US house prices fueled the 2008 global financial crisis. But what if next time it’s the car parked in the house’s driveway outside that causes problems? A report on Monday from Charles Schwab wonders if rapidly declining auto sales could wave the chequered flag on the current, record-breaking bull market 🏁

What does this mean?

Global car sales are down 6% year-to-date, led by declines of 10% in China – the world’s biggest auto market – and 3% in Europe – the second-biggest.

Source: Charles Schwab, Bloomberg
Source: Charles Schwab, Bloomberg

In the US, meanwhile – the world’s third-largest market for cars – sales have been more stable. But rising sticker prices and interest rates on auto loans have forced Americans to shell out more of their paycheck on their vehicles each month. Ten years ago the average new US car cost $30,400, including options like fancy paint. Since then prices have risen 28% to $39,000. And the average rate on a car loan is close to 5%, up from 3% five years ago.

Source: Charles Schwab, Bloomberg
Source: Charles Schwab, Bloomberg

Back in the US housing boom of the 2010s, rising home prices forced Americans to spend more of their income servicing their mortgage payments. This time around more and more households are struggling to keep on top of their car payments, leading to a rise in unpaid (a.k.a. “delinquent”) loans.

Source: Charles Schwab, Federal Reserve, Bloomberg
Source: Charles Schwab, Federal Reserve, Bloomberg

In both cases, more money spent servicing debts means less cash for other stuff – hurting the overall economy.

Why should I care?

In short: with US stock prices at record levels, weakening demand for cars is a worrying sign for markets and the economy.

“A downturn in auto production following tumbling car sales is driving a bust in manufacturing and threatening a recession for the global economy,” according to Charles Schwab. “A big risk is that the downturn, which started with autos and has spread from manufacturing to earnings and on to business spending, may soon begin to spread to the job market and undermine consumer spending.”

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