Economists See Uncertainty in Approaching Year Featured

By Jeffrey Bellant December 06, 2018

 

SCOTTSDALE, Ariz. – Industry economists see a tightening of the credit market, some uncertainty on the political front and continued growth in the digital wholesale space.

A panel discussed these issues during the 70th National Auto Auction Association convention here last month.

Tom Kontos, chief economist of KAR Auction Services, is encouraged by the low unemployment rate.

“Paychecks yield payments,” he said.

Kontos, however, said in light of the so-called gig economy and aging of the Baby Boomers who are extending their employment life, the “natural rate of unemployment” may be different this time around.

“I do believe there should be some consideration due to the relative lack of inflation, though there are some signs of inflation raising its ugly head,” Kontos said.

“Regardless, we are in a rising interest rate environment. The question is, can it be managed without creating a recession?”

Tony Hughes, managing director of Moody’s Analytics, agreed with Kontos’ concern, even though he likes where things are now.

“Really, the economy at the moment is very strong,” he said. “We’ve got an unemployment rate that’s well below the natural rate. The economy is really in full throttle at the moment.”

Hughes said he normally focuses on risk, and the area that concerns him is monetary policy.

“In order for the economy is kind of remain stable, the Fed has to find a way to engineer a raise in the unemployment rate – from 3.5 percent up to the natural rate of 4.5 percent.”

Hughes said the economy has to worsen so it doesn’t overheat

“(A soft landing) is a very difficult thing to pull off for monetary policy (makers),” he said. “The Fed hasn’t often been successful at pulling this off.”

Jonathan Smoke, chief economist of Cox Automotive, said digital/offsite/online sales are still where the growth is for wholesale.

Outside of digital, Smoke sees declines.

“It’s a long-term shift for the industry,” he said.

On the lending side, Smoke said consumers are sensitive to payments, so thay are are not rising as much as the interest rates would imply.

“When you go into deep subprime interest rates,” Smoke said, “they’re already at a point in many places where (rates) are at the state usury limits in those states.

“So what happens when the rate goes up another quarter or half point? “

Kontos said there’s already been an increase in loan terms growing to 60 months, 72 and even 84 month.

A consideration of higher down payments, longer terms or any decrease in trade-in values will all be factors, along with purchase price, he said.

Kontos said even though the used-car market often does whatever it can to meet the consumer’s price point, at some point even the used-car market can’t do it anymore.

Smoke added that lenders end up tightening up standards and forcing turndowns on big-ticket items like houses and cars, Smoke said.

In terms of vehicle preference, Kontos said there is a migration to higher-sticker price vehicles from cars to light-duty trucks. But with price considerations, it might mean customers may desire fewer options or less content to keep payments lower for a more expensive vehicle.

Hughes said this move to pick-up trucks and SUVs goes back decades.

“Americans have been pushing toward SUVs for a very long time,” he said.

Kontos is open to the prospect that new-car sales will be affected by rising interest rates. But he said there is still good demand for vehicles coming off-lease.

 

 

 

 

 

 

 

Last modified on Friday, 07 December 2018 16:25