Despite Strong Job Market, Slow Wage Growth Remains Challenge for Lenders

The economy is in a healthy place that has helped bolster consumer confidence, but an overlooked challenge for lenders is the lack of consumer income growth, Mark Vitner, senior economist and managing director for Wells Fargo Securities LLC, told Auto Finance News.

“Income growth has been fairly sluggish,” Vitner said. “But, historically, the No. 1 determinant of whether consumers are willing to borrow money is how secure they feel in their job, and right now, folks feel pretty secure about their jobs.”

The unemployment rate was 3.9% in July, continuing a streak of near-historic lows that haven’t been seen since the dot-com bubble of 2000, according to the Bureau of Labor Statistics. However, while people might feel secure in their jobs, income growth has not risen to meet the rising price of cars.

“Among some of the folks with lower credit scores, a lot of them have borrowed money at higher interest rates,” Vitner said. “They’ve borrowed money on extended terms and their car wore out before they were able to pay it off, and so they had to roll the residual value of that car into their next car loan. There are some folks that just haven’t seen a lot of income growth, and they are having a hard time building any equity in their current vehicle.”

Wage growth has stayed above 4.5% for nearly all of 2018 compared with gains of 3.5% annually for most of 2017, according to the Bureau of Labor Statistics. However, consumers have about the same purchasing power they had in 1978 when accounting for inflation.