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Thursday, June 11, 2015 11:07 AM

Retail Sales Bounce as Expected; How Much Longer Can Subprime Auto Sales Lead?

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Economists got one right for a change. Retail sales bounced 1.2% led by autos vs. the Bloomberg Consensus Estimate of 1.3%.

Auto sales were known to be strong ahead of the report, likely steering economists in the right direction.

The consumer showed a lot of life in May, driving up retail sales 1.2 percent with gains sweeping nearly all components. A leading component in the month was motor vehicle sales which jumped 2.0 percent, excluding which retail sales still rose a very strong 1.0 percent. Another component showing special strength was gasoline sales which got a boost from higher prices. Still, excluding both of these components, retail sales ex-auto ex-gas gained a very solid 0.7 percent. These results offset weakness in April, when total sales rose only 0.2 percent (upward revised from no change).

In contrast to weakness through most of the April report, there's only one component showing contraction in May and that's the usually solid health & personal care stores at minus 0.3 percent. Standouts on the plus side, apart from vehicles and gasoline, are building materials & garden equipment stores, up 2.1 percent, clothing & accessories stores, up 1.5 percent, and nonstore retailers, up 1.4 percent. Department stores, which sank a steep 2.9 percent in April, rebounded with a 0.8 percent gain.

The long awaited rebound from the soft first quarter is finally here. Today's results will have forecasters upping their estimates for second-quarter GDP. These results will also be a key point of discussion, especially in arguments by the hawks, at next week's FOMC meeting.

A sales snapback was coming at some point. May was the month following months of disappoints.

This will add to GDP. We will see how much in the Atlanta Fed GDPNow forecsast later today.

Year-Over-Year Picture Not Strong

In spite of the snapback, year-over-year sales except for autos are hardly robust. A picture from the Commerce Department Advance Retail Sales Report for May 2015 tells the story.

click on chart for sharper image

Year-Over-Year Numbers

  • General merchandise is down 0.4%
  • Ex-auto sales are up 1.0%
  • Auto sales up 8.8%

Next Subprime Crisis, Auto Loans, Won't End Well

Stories about subprime auto sales have been circulating for months.

Forbes had a nice report at the end of January: The Next Subprime Crisis, Auto Loans, Won't End Well.
Less than 10 years removed from the worst credit crisis in history, you would think ads like this would be hard to come across:

They’re not. In fact, sales of US subprime auto ABS totaled more than $17.4 billion in 2014, after a record $22 billion were sold in 2013. Auto lenders have even started offering ABS with a “prefunding” feature that effectively packages securitized bundles of auto loans before they’ve even been made. While that might sound crazy and reminiscent of 2008, easier lending standards have been a big driver of vehicle sales that continue to beat expectations. The head of Honda’s US sales recently warned that competitors are doing “stupid things” to gain an advantage.

Research from Experian , a credit firm, shows that the average duration of new car loans is at an all-time high of 5.5 years – with 25% of loans extending for 6-7 years, and some lasting 8 years or longer. The number of auto loans outstanding with subprime borrowers was 23% of the total in 3Q 2014. Increasingly those subprime borrowers are falling behind on their payments. More than 2.6% of borrowers who took out loans in the first quarter of 2014 had missed at least one monthly payment by November – the highest level of early trouble since 2008, when delinquencies rose above 3.0%. For borrowers with weak credit scores the delinquency rate was 8.4%.
Subprime auto sales still led the way in consumer spending. How much longer is anyone's guess.

This is yet another bubble fostered by the Fed's loose monetary policies. It's hard to say when, but auto sales will collapse out of the blue at some point, taking retail sales down with them.

Mike "Mish" Shedlock

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