There were two headlines last week that seemed at odds with each other. Gross Domestic Product (GDP) rose in the second quarter by 2.8%, much higher than expected. At the same time, vehicle repossessions are spiking.
What gives?
"GDP exceeded expectations in the second quarter, restoring faith that the economy is easing into a sustainable level of growth," America's Credit Unions deputy chief economist Curt Long said in a statement."Recent statements from Federal Reserve officials confirm that a rate cut is squarely in view. However, such action is not needed to ward off a recession but is rather a response to the moderation in inflation."
That all seems positive. So, why are some Americans having a hard time holding onto their cars and trucks? According to Cox Automotive, repossessions surged by 23% over 2023 in the first half of 2024.
Hidden struggles
Eric Kelley, an economist and chief investment officer at UMB Bank, says consumers could be struggling more than most economists realize. He notes that the true leading indicators for the labor market are all in severe downturns.
“It definitely appears that the labor market is softening,” Kelley told ConsumerAffairs. “Jobs are becoming harder to find and wage growth is cooling.”
The official unemployment rate has been slowly climbing and has now reached 4%. Kelley says that’s a sign the labor market is cooling off, and many people who bought expensive vehicles a few years ago may no longer be working.
“In addition to that, the San Francisco Fed has published data showing that all of the excess savings built up during COVID-19 have been completely burned off,” he added. “Simultaneously, normal savings rates in the U.S. have dropped to near all-time lows.”
Increasing vulnerability
While the average household has spent all of its stimulus money, it is also socking away less money on a monthly basis.
“This would make them vulnerable to any disruption to their income stream --- which we know is happening as the unemployment rate climbs,” Kelley said.
Maryann Monforte, a professor at the Whitman School of Business at Syracure University, suggests the car repo data might be a little misleading.
“Car repossessions were down 2020 to 2022, due to more forgiving lenders, and government stimulus money that was used to cover payments that were in arrears,” Monforte told us. “In 2023, things changed. Lenders weren’t so forgiving and stimulus money has long stopped.”
Monforte says 2023 repo levels were on par with 2019 levels. Households, meanwhile, are dealing with higher car insurance payments and rising housing cost, which contribute to missed car payments and this year’s increase in repossessions.
