The future is uncertain, and success or failure is not predetermined
They say nothing in life is certain, and as we head into 2023 that statement is ever more accurate. The dichotomy of future concerns paired with positive trends is not a common occurrence. For example, over the past 3 years we’ve seen record high small-business start-ups at an average of almost 400K new start-ups per month, almost 2 times the historical average, combined with historically low small business delinquencies. One might think that would indicate strong growth in the future? At the same time, we have the micro-economic variations across industries. One example is auto, where demand is high, inventory is low, interest rates are going up, and price pressures are constantly changing.
So how do we predict what’s going to happen in future lending?
Breaking out the Crystal Ball
The reality is no one can predict what’s going to happen. The best thing we can do is share what we know and arm auto lenders and dealers with information to make the best decisions possible.
On that note, the best place to start is what we’re seeing in lending (Based on Equifax’s most recent Small Business Indices):
Small business lending is down 7.3% from a year ago, December 2022. Before December, lending was still slightly up or flat from previous years.
Small business delinquencies are also up slightly by 1.43% from a year ago, December 2022.
While both the small business delinquency and default indices are low by historical standards, they are on the upswing. They are starting to show signs of potential stress.
For the auto industry specifically, there are also a few key trends that are worth keeping an eye on:
A record number of dealerships changed hands in 2022
Avg. monthly payments across all credit tiers is up, due to increased car prices
Auto loan volumes are at an all-time high
The average credit score for borrowers has never been higher
Auto loan debt is the third-largest source of debt in the United States
Auto loan debt grew despite 2019–2020 headwinds
Beware of the Potholes
At Equifax, having worked with so many different companies across a multitude of industries that leverage our data to make more informed decisions, there’s still that nagging concern from customers around, “what don’t we know.” In the auto space, there are a couple of areas that could impact growth.
The first big factor are supply chains. We already have seen how the lack of materials and microchips slowed the production of new vehicles in 2020 and 2021. This resulted in low inventory and higher than normal increases in pricing (both new and used vehicles). This is not unusual considering the average annual cost of supply chain disruptions to each organization surveyed in 2021 equated to $182M in lost revenues or costs (2022 Annual Supply Chain Report).
At the same time, one of the other big factors impacting potential growth in 2023 is the good, old-fashioned supply and demand economy. Inventory has started to increase as supply chains have started to equalize and prices are starting to soften following a number announcements from manufacturers, including Tesla (Money, Feb 2023), about decreases in their MSRP’s. Combine that with the high interest rates and potential for higher unemployment we’re seeing businesses and consumers hunker down a bit.
The impact of these trends on auto lending
Going back to something we said earlier, the reality is there’s no telling what’s going to happen in the coming months and year(s). What we know is the last few years of ups and downs in the auto space may not have followed historical trends. ut, as we head into 2023 we’re starting to see more normalization. Whether this is good or bad is yet to be determined, but at Equifax we are confident that we have the data that our clients need to make the best decision possible at the time they need it.
Sources:
Five Trends to Rule the Auto Industry in 2023, Entrepreneur (Jan 2023)
Auto Loan Industry Study, Supermoney (Nov 2022)
Market Monitoring Insights, CFPB (Sept 2022)
2022 Annual Supply Chain Report, Equifax in Partnership with Interos
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