Monday, November 21, 2011

Buying and Borrowing

The Lehmann Letter (SM)

Earlier this month the Commerce Department and the Federal Reserve reported 13.2 million October new-vehicle sales and an $88.8 billion September increase in consumer credit.

New Vehicle Sales

(Click on chart to enlarge)

(Recessions shaded)

Consumer Credit

(Click on chart to enlarge)

(Recessions shaded)

These numbers appear to be healthy when placed in the context of the charts: New vehicle sales have grown since their recession bottom and so has consumer credit. But there is a real danger that they will now stall, creating a plateau that is inadequate to sustain a healthy economy.

New vehicle sales and consumer credit move in tandem because auto buyers rely on consumer credit to finance their purchases. The charts inform us that new-vehicle sales were in the 16 to 17 million range from 2002 to 2007 and that consumer credit grew by about $100 billion monthly - at a seasonally adjusted annual rate - in those years. Will they return to those robust levels?

Consider consumer confidence.

Consumer Confidence

(Click on chart to enlarge)

(Recessions shaded)

Consumer confidence hovered around 100 during the 2002 to 2007 boom years. The chart reveals that consumer confidence has been fluctuating around 50 since the depths of the recession and has now dropped to around 40. The Conference Board is scheduled to release its latest data on November 29.

Unless consumer confidence pops upward to start a new climb, it's difficult to imagine that households will be sufficiently optimistic to begin a new auto-buying and borrowing binge. Gloomy consumers scale back; they don't push forward. Why should they? Their balance sheets remain compromised and good news has been scarce lately. Households have every reason to exercise restraint.

That's why it's hard to imagine a healthy level of auto buying and financing and a return to a robust economy.

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© 2011 Michael B. Lehmann

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