| NEW YORK, March 31
NEW YORK, March 31 Forget the jobs report. The
most interesting bit of U.S. economic data next week is Monday's
auto sales release, which will offer a measure of the
middle-class consumer and a sector of the stock market that has
had a rough ride so far in 2017.
Economists are looking for another solid month of sales
north of 17 million new vehicles at a seasonally adjusted
annualized rate for March but nothing like the 18.4 million hit
in December, the highest since August 2005.
The number would however point to a third consecutive
decline on a 12-month rolling basis. With sales peaking and
prices set to drop, the secondary effects are expected to be
felt beyond car makers and dealers.
Lease and used-vehicle prices are expected to fall sharply
this year, according to Ally Financial, which cited its estimate
earlier this month when it lowered its 2017 profit forecast.
Morgan Stanley said in a Friday note used-car prices could
tumble between 25 and 50 percent by 2021, with both new cars and
off-lease supply hitting record highs this year.
"There's an avalanche of used cars ready to hit the market
place," said Brad Lamensdorf, co-manager of the AdvisorShares
Ranger Equity Bear ETF.
According to Lamensdorf, the need to move inventory has
translated into reckless lending. "It's not fraudulent, but
people are up to their neck in debt," he said. "Default rates
are going to be much more significant."
The stock market is taking note. The S&P 1500 automotive
retail index is down 6.5 percent year to date, with
Advance Auto Parts, AutoNation and Sonic
Automotive down double digits in 2017.
Carmax, which reports earnings on Thursday, is seen
as a bellwether in the used-car industry. Its stock is down 8
percent so far this year.
Another red flag from the sales floor: the average number of
days a new vehicle sat before being retailed hit 70 in the first
19 days of March according to a note from J.D. Power and LMC
Automotive. That is the highest since July 2009.
With the market tightening, industry insiders expect more
"The competitiveness of the industry continues to be evident
in ever-rising incentive levels," said Deirdre Borrego, senior
vice president of automotive data and analytics at J.D. Power in
"Incentives will reach a new high for the month of March."
At the same time, competition to finance loans is likely to
further increase credit risk for auto lenders, Moody's Investors
Service said this week.
Ally Financial stock fell 9.6 percent in March.
Even the challenge to General Motors this week from a
hedge fund, aimed at boosting a lagging stock price, reflects
the concern that the industry is hoarding cash without
significant prospects for growth.
NO RECESSION, BUT ...
The market for autos, however important, is not as big a
part of the U.S. economy as the housing market was when its
collapse in 2008 triggered the sharpest recession since the
However, and taking into account all the moving parts of the
industry's supply chain, a halt in the auto sector could strain
an economy that is already eight years into a recovery cycle.
And it would hurt blue-collar workers the most.
If a jump in auto loan defaults materializes, there is also
the risk that consumers will shut their wallets and hurt
economic growth, two-thirds of which depends on consumer
"When you look at how consumers are spending there is a
question mark if the less-than-prime buyer is suddenly having
issues," said Ian Winer, head of equities at Wedbush Securities
in Los Angeles.
"The spillover effect is: what other industries are also
using rather aggressive financing in order to get revenue?
Jewelry and mattresses jump out at me as two big examples."
Tempur Sealy shares have fallen 32 percent year to
(Additional reporting by Nick Carey and Joe White; Editing by