An Increasingly Bifurcated Credit Market in Auto?

NEWPORT BEACH, Calif. — A study this past April from the National Employment Law Project found that middle income jobs lost during the recession have not been coming back at the pace economists might have hoped during the recovery.  Instead, low-wage jobs have accounted for 44% of new jobs created, while those on the high-end accounted for 30%.   Meanwhile, middle-wage jobs only accounted for 26% of new positions.

So, if that sort of job growth leads to an increased bifurcation in the labor market, what does that mean for the demand for auto loans?

After a presentation on the macro-economy at the Auto Finance Risk Summit in Newport Beach, Calif. on Monday, Moody’s Analytics Managing Director Steven Cochrane indicated that the current pattern of job growth could lead to an increasingly bifurcated credit market.

“If I go back and look at the pattern of labor growth,” he said, “and that so many jobs being created right now are on the low-wage end of the scale, those folks are getting full-time work, they need to get to work, buy things, which can be a generator of demand for credit — and that most likely would be in the subprime space, rather than the prime space.”

As Cochrane told Auto Finance News, the optimal outcome would be more-balanced job growth, meaning more growth in middle-income positions, which in turn would balance out demand for credit.

But there’s a catch.

“The difficult thing to forecast is whether the growth we’re seeing is cyclical,” said Cochrane.

It’s easy to hire low-wage workers, he said: the cost is not high, and so the decision is easy for higher-ups in a company. On the flip side, companies have to hire some high-wage workers, workers who are skilled, technical, are managers and others. But, it’s easier to pull back on filling some of those mid-wage positions, particularly if computers and automation can take the place of some of those mid-wage earning people, he explained.

Even jobs as fundamental as accounting or engineering are much more efficient and require much less labor than in years past.

“The cyclical side of the picture would tell me that those mid wage jobs are going to pick up, but, the sort of secular change in the economy tells me that there’s some risk that the mid wage won’t pick up as fast as we’d hoped, and instead there’s a new bifurcated labor market, and that would create some bifurcation in the credit markets,” said Cochrane.

There will be a market for deep subprime as well as “optimal” prime, he said.

Cochrane said red flags might get raised if the economy’s fundamentals change, and if default rates start to rise more quickly as originations rise.

“It’s often when the economy is bad and originations are slow, but those originations are pretty good quality,” he said. “And then, as the economy picks up, and, perhaps, lending standards ease, that credit quality may actually begin to sink as lenders take their eye off the critical factors.”