Missing the Forest for the Trees

There is a tendency among market commentators to seize upon a data point and declare that hellfire and brimstone are about to come raining down. They blow things out of proportion. They see fire when they should be on the lookout for ice. A recent example is auto loan delinquencies. This looks bad:


Here’s a typical reaction, by which I mean, one completely lacking in perspective:

  • The number of auto loans at least 90 days late exceeded 7 million at the end of 2019 hitting the highest level in decades.

An old boss of mine would have told them to stop hyperventilating.

Of course auto loan delinquencies are growing and hitting the highest number in decades. Population grows. Loans grow. Delinquencies grow. We need some context here.

Auto loans rose from 40 million in 1999 to 89 million in 2018. The question that should be asked is whether delinquencies are growing disproportionately relative to loan growth. Hey, it looks like they have been. What’s going on?


Source: Federal Reserve Bank of NY

Subprime car loans, those with a credit score under 620, and loans at the next worst rating are becoming delinquent at rising rates. This is concerning, given the low level of unemployment and expanding economy.


Source: Federal Reserve Bank of NY

However concerning, it is not systemic. The share of sub-prime auto loans has declined as a percent of all auto loans since the financial crisis.


Source: Federal Reserve Bank of NY

So, should we be worried? Are the following views plausible?

  • Auto loan delinquencies are flashing some scary signals on consumer debt in the US…
  • Subprime autoloan delinquencies have almost reached the Great Recession peak of 4.7%… Consumer credit is heading down the drain.

Actually, no. Auto loans are 9.4% of consumer loans in the US. This is similar to where they were in 2003 as the housing bubble began ramping up. There is something unhealthy going on in subprime auto lending, no question. It’s just not large enough to cause a systemic problem.

My view, unsurprisingly, accords more with the following:

  • Today’s narratives are: US consumer in serious trouble (as evidenced by auto loan delinquencies) and Europe headed for severe recession (due to IP miss). Adjust accordingly (I would fade both in the near term).

I think what we are facing here in consumer debt is more ice than fire. Aggregate consumer lending delinquencies, comprising auto loans, mortgages, home equity lines, student loans* and credit cards, have fallen, but not to the lows of the prior expansion. Severe delinquencies are noticeably higher than they were pre-crisis.  My guess is that this is one factor behind the sluggish GDP growth we’ve been experiencing in the US for the last ten years. Folks saddled with debt are unable to boost their spending. It may not be systemic, but there is a meaningful part of the US population that just can’t get out from under.

Total delinquent

* If you are wondering about student loans, post crisis they have grown at high rates too. They are causing serious problems for borrowers, but will not cause a systemic crisis because they are almost entirely owned by Uncle Sam.



This entry was posted in Consumer Credit, Credit and tagged , . Bookmark the permalink.

1 Response to Missing the Forest for the Trees

  1. Bob Gilbert says:

    Are there data on car leasing delinquencies? What are trends with leasing? Thanks.


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