DEKALB, Ill. — Don’t look to houses or dot.coms to find what could cause the next economic bubble to burst.
One of the causes could be sitting right next to you — or you could be sitting in it — at the stop sign.
“Another canary in the coal mine is auto finance,” said Bill Moore, vice president of asset and liability management for Compeer Financial.
Moore gave a presentation at a swine industry outlook meeting at the DeKalb County Farm Bureau. He talked about the current economic picture and what could be expected going forward.
While there are plenty of positive signs — low unemployment and high consumer confidence — there are some warning signs that the U.S. economy could be heading for another recession, reminiscent of the housing bubble-led recession of 2007-2009 and the dot.com bubble of the early 2000s.
“Consumers are very optimistic, almost as optimistic as we’ve been, only being beat by the dot com bubble of 1999-2000. Lots and lots of people are on the positive side,” Moore said.
When consumers are feeling good, they buy and consumers have purchased goods.
“Consumption, since 2016, on the consumer side, has outpaced income growth for two consecutive years,” Moore said.
One of the things that consumers have purchase is cars. While that spells good news for the automotive industry, automotive and related jobs, it could be a signal that the economy might be heading for a downturn.
“The average car payment is $523 a month. That’s an incredible number. That’s the average. The term is about 5.5 years, but terms are extending up to 96 months. People will be paying off cars they don’t even own anymore,” Moore said.
Driving The Debt
What’s creating the bubble, a potentially unsustainable situation, is the credit worthiness of some of the people buying some of those cars and how.
Moore said around 107 million Americans have an auto loan, many of those with multiple vehicle loans.
That number is up 27 million from five years ago.
“Twenty-five percent of the auto loans written today are subprime, meaning their FICO scores are below 620,” Moore said.
If the word “subprime” rings a bell for some, that’s because another type of subprime loans sent the U.S. housing market into a tailspin.
“Subprime, does that sound familiar to anybody? We were doing that on the subprime housing loans in the early 2000s. It certainly didn’t work out great,” Moore said.
He said that loan atmosphere is starting to send warning signs.
“You’re starting to see a blip in the credit of those; the 60-day delinquency of subprime auto loans is now almost 6 percent. That’s up a third from February 2014. It’s the highest rate we’ve seen since October 1996. You’ve got rates, monthly payment rates and the length of the contracts and delinquencies going up at the same time,” he said.
In what, for those familiar with financial markets and with the subprime housing loan crisis, might sound like déjà vu, a similar situation, albeit on a smaller scale, is developing in the auto loan industry.
“You’ve got specialized lenders who are focusing on auto finance, particularly on subprime, that are gathering together loans, structuring them into asset-backed securities and selling them for the market,” Moore said.
What Comes Next
A tool that the federal government can employ to slow inflation and cool an overheating economy is interest rates. New Fed chairman Jerome Powell implemented two rate increases so far this year, in March and then most recently in June.
“The statement that they put out was they expect a gradual increase in the Fed funds rate, the rate that they publish. It will be on a gradual path as long as it’s consistent with the economy doing OK, labor market doing OK and that inflation stays near 2 percent,” Moore said.
Anything that happens to the contrary, whether on the negative or positive side, could change that decision.
The Fed’s “dot plot,” the published expectation for what Fed officials believe future interest rates will be, suggests two more rate increases yet this year. The Fed will meet July 31-Aug.1, again Sept. 25-26, Nov. 7-8 and finally Dec. 18-19.
Moore said the dot plot suggests more rate hikes in 2019.
“It suggests we’ll have two more rate increases in 2018, potentially three, and as many as four in 2019,” he said.