Auto Market Weekly Summary: December 19

Inflation declined in November, according to the Consumer Price Index, but prices remain high.

Still worried about inflation, the Fed remains hawkish about pushing rates higher early in 2023 after increasing rates by 50 basis points last week following four straight 75-BPs increases.

Auto loan performance deteriorated further in November. The default rate in November was higher than the default rate in November 2019. Severe delinquencies are far higher than in 2019, especially for subprime loans.

Retail sales declined in November, and adjusted for inflation, retail sales were down from a year ago.

Initial jobless claims declined in the latest week, but continuing jobless claims are at the highest level in 43 weeks.

Inflation Slowed Again in November

According to the Consumer Price Index (CPI), inflation slowed again in November as all measures of inflation decelerated. The headline aggregate measure increased by 0.1{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724} when a 0.3{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724} increase was expected on a seasonally adjusted basis. The increase was down from 0.4{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724} in October.

The core CPI, which excludes Food and Energy, increased by 0.2{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724}, which was less than the 0.3{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724} prior increase and what had been expected. Energy prices declined in November, which helped with the declines in the headline CPI. However, shelter and food price growth remained high and at the same levels of growth as in October.

A few categories saw accelerating price growth, including motor vehicle maintenance and repair, education, and communication. Used cars, car and truck rental, and airline fares all saw large declines.

Vehicle prices again moved in different directions in the CPI. They reflected what we have been seeing in the auto market, as new vehicles saw a decelerating 0.1{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724} increase in November, while used vehicles saw a 2.9{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724} decline.

On a year-over-year basis, core CPI decelerated to a 6.0{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724} increase from 6.3{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724}. The overall CPI declined from a year ago to 7.1{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724} from 7.7{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724}.

Fed Raises Rates … Again

The Federal Reserve increased the Federal Funds rate by 50 basis points, a smaller increase than the four straight 75 basis-point increases that preceded it. The increase brought the rate to 4.25 to 4.50{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724}, the highest since 2007.

The Fed remains hawkish about the need to push rates higher by at least another 75 basis points early in 2023, which will likely come in the February and March meetings. Such moves would bring the terminal Fed Funds Rate to 5-5.25{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724}. Consumer rates are destined to be at 20-plus-year highs by year-end. For the auto market, that has substantial long-term implications for product mix and affordability challenges.

Loan Delinquencies Rose in November

Auto loan performance in November saw further deterioration. Loans delinquent by 60 days or more increased by 3.3{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724} and were up 27.5{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724} from a year ago. Of all auto loans, 1.74{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724} were severely delinquent, an increase from 1.73{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724} in October and the highest rate since January 2010. Compared to a year ago, the severe delinquency rate was 38 basis points higher.

In November, 6.75{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724} of subprime loans were severely delinquent, increasing from 6.69{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724}. The subprime severe delinquency rate was 158 basis points higher than a year ago, and the November rate was the highest in the data series back to 2006.

The high level of severe delinquencies is starting to lead to higher levels of defaults. Loan defaults increased 26.6{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724} from October and were up 34.2{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724} from a year ago. The annualized auto loan default rate in November was 3.01{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724}, higher than the 2.95{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724} rate in November 2019.

Retail Sales Drop More Than Expected in November

Retail sales declined in November more than expected. The initial estimate for November showed spending down 0.6{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724} when a decline of 0.2{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724} was expected.

The auto sector performed worse than the overall market as sales excluding motor vehicles and parts declined 0.2{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724}, while sales of motor vehicles and parts declined 2.3{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724}. As gas prices fell in November, spending at gas stations declined 0.1{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724}.

Few categories saw gains in November. Motor vehicle and parts dealers, building material (-2.5{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724}), and furniture, home furnishing, electronics, and appliance stores (-2.2{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724}) saw the largest declines. Food services and drinking places (+0.9{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724}) and food and beverage stores (+0.8{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724}) were the largest gainers.

Retail sales were up 6.5{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724} from a year ago on a nominal basis. Compared to last year, only furniture, home furnishing, electronics, and appliances (-3.6{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724}) were down. Adjusted for inflation using the CPI, retail sales declined 0.7{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724} for the month and were down 0.6{12dec99aef6f119e349308ab81c83b123ba77cd3d9c980ff09eaac1f958a2724} from a year ago.

Initial Jobless Claims Declined in Early December

Seasonally adjusted initial jobless claims declined by 20,000 to 211,000 for the week ending December 10. Non-seasonally adjusted claims declined by 39,000. Both numbers remain higher than at the beginning of 2020 before the pandemic began.

Continuing claims, which represent people who previously filed and remain on traditional unemployment compensation, increased by 1,000 from the previous week, bringing the total up to 1.67 million as of the week ending December 3. That level of continuing claims was 92,000 lower than before the pandemic but the highest level in 43 weeks.

The broadest measure of continuing claims increased by 302,000 to 1.59 million in the latest data, which lags the traditional number and is not seasonally adjusted. That total measure is up 280,000 over the last four weeks but is 517,000 lower than the pre-pandemic level.

Join us for the 2023 Cox Automotive Industry Insights and Forecast Call hosted by Chief Economist Jonathan Smoke and the Industry Insights team on Thursday, January 12, at 11 a.m. EST. During this 90-minute session, you will hear how the auto industry performed in 2022 and how the Cox Automotive team sees the industry progressing in the new year.

Jonathan Smoke is the chief economist at Cox Automotive.