Consumer credit increased in April, partly on auto loan growth. That’s being driven by pent up demand and the desire to lock in low rates, just like home sales. The party could go on for a little longer, but keep an eye out for the tipping point.
Bloomberg recently reported that consumer credit in The United States is accelerating. In many ways that’s a good sign because consumer spending is a big part of the economy. However, credit card debt isn’t taking off. Big ticket items are fueling the advance, such as school loans and car loans.
School loans have something of a perverse dynamic right now, but auto sales are a clear bright spot. The 2007 to 2009 recession took a serious toll on car sales. General Motors Company (NYSE:GM), for example, was so weakened that it took a government handout and still had to make a trip through bankruptcy.
According to fund manager Mario Gabelli, however, the U.S. auto fleet has the most vehicles off of warranty ever. So it isn’t surprising that customers are looking to replace their aging vehicles with new ones. Low interest rates are a supporting factor, since they make taking out a $30,000 loan allot cheaper. The fear of rising rates, however, could be pushing sales, too. That, in turn, could lead to a tipping point where rates advance to the point where buying a car is no longer desirable and sales fall.
Ford Motor Company (NYSE:F) is probably the best auto option today. The company’s image with consumers has been elevated by the fact that it didn’t take government handouts or go through bankruptcy. That’s a differentiation that can’t be taken away from the company. Like the other automakers, however, Ford Motor Company (NYSE:F) used the downturn to restructure its business and streamline operations.
It sold non-strategic brands and focused on cost savings. It is now a leaner and more competitive player. The shares have had a nice run, but are still well off their all-time highs. The stock offers an around 2.5% yield, boosted by a recent 100% dividend increase. Sales, meanwhile, have been higher year over year for the last two quarters and the company has turned a profit in each of the last ten quarters.
While the buying lasts, Ford Motor Company (NYSE:F) should be a solid performer. However, keep a close eye on rates. If they increase quickly or too much, sales could become increasingly difficult to make. With still stagnant wage growth, that point could be sooner than many hope. If sales fall off, consider jumping ship.
A Trip Through Bankruptcy
General Motors Company (NYSE:GM), however, shouldn’t be forgotten. The company also streamlined during the recession, taking advantage of bankruptcy to shed some of its burdensome legacy costs. It also trimmed its brand lineup back to a more manageable level. Both are huge benefits, though the General Motors Company (NYSE:GM) name was tarnished in the process.