Yellow Lights Flash Warning Inside Auto Industry
A bankruptcy for one lender, warning signs for a parts supplier and CarMax skids.
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Estimates for second-quarter gross domestic product growth were revised up for the second time last week. This time to a robust 3.8%. Currently, the Atlanta Fed’s GDPNow has similar GDP growth projected for Q3.
But here's the catch: This growth is not broad-based.
A huge surge tech-related spending has driven by the AI revolution and the construction of myriad multi-billion-dollar AI data centers. The economy is also getting boosted by large and continued fiscal deficit spending, which at some point will become unsustainable. Defense spending also remains robust.
Outside of these areas, it is hard to find much strength in the economy, despite sparkling headline GDP numbers. The jobs market has clearly deteriorated over the past couple of months, and inflation remains problematic. Existing home sales remain stuck at the lowest levels since 1995, when the population was some 20% lower. New home builders are having to offer large incentives to move inventory, and the housing market has turned over in major metros like Austin, Tampa, New Orleans, Dallas, Phoenix and Oakland. It feels like the early innings of a significant housing bust.
Commercial real estate continues to struggle with delinquency rates on commercial-backed mortgage securities, or CMBS, on office properties. These are higher than they were at the peak of the Great Financial Crisis. Multifamily housing, which has roughly 40% of the $4.8 trillion of commercial real estate-debt outstanding, is encountering accelerating turbulence. This sector has seen CMBS delinquency rates more than double over the 12 months to nearly 7%.
A good chunk of the consumer population is struggling with high levels of debt and most American households have little or no savings. Consumer Sentiment is dismal and is likely to get worse given the state of the jobs and housing markets. Today, we will add one more economic canary in the coal mine: the automotive ecosystem.
Large subprime auto lender Tricolor Holdings went bankrupt unexpectedly earlier this month with some $2 billion in obligations. The filing closed some 60 locations, terminated 1,000 employees and put some 100,000 auto loans in a state of flux with this asset-backed lender. Auto parts supplier First Brands also looks to be heading toward bankruptcy with between $5 billion to $10 billion in liabilities, much of which was financed via factoring. Taken together, this feels like they could be cracks in an off-the-radar part of the credit space.
Completing our automotive trifecta is CarMax, Inc. (KMX) . This used car dealer saw its stock plunge by more than 20% last week after posting dismal quarterly earnings. Profits came in more than 35% less than expected as revenues fell 6% on a year-over-year basis. The company’s allowance for loan losses moved up from the first quarter to just over 3%. Management outlined $150 million in cost cuts.
It is not surprising at all that the lower end of the auto market is struggling mightily. As I noted in an article last week, consumer spending is largely being held up by the top 10% of income holders. That noted, auto manufacturers like General Motors (GM) are struggling with significant tariff costs. The average new car payment is also north of $700 a month.
So, the automotive space is just the latest canary in the economic coalmine.
At the time of publication, Jensen had no position in any security mentioned.
