After a years-long boom in auto sales, there's been a lot of speculation about whether the sales bubble has finally burst and what that means for the broader U.S. economy. February auto sales were down -5.4% month-over-month to 16.53 million cars sold. The decline was said to portend a slowdown in consumer spending that could finally hurt, what's been, an epic rally in the stock market since Election Day (the S&P 500 is up +10% since then).
While searching for bubbles in one-off data points is newsy, it doesn't capture the big picture. You have to look at trends in supply and demand. Understanding these market dynamics helps separate the nasty bubbles from the false positives.
A Brief History of Bubbles
How do bubbles develop? As you can see in the graphic below, bubbles start with surging demand that outstrips supply. Prices go up. Delinquencies and foreclosures fall. Feeding the mania, credit standards slip. Lending increases. It's a self-perpetuating cycle that doesn't pop until it does...
What's Happening in Auto Sales
Slipping auto sales is definitely something to keep an eye on but not necessarily a cataclysmic event for the broader economy. To be sure, demand is falling. As you can see below, supply has been rising for some time now too. The U.S. vehicle inventory ratio is the highest of any expansion since 1989.
Meanwhile, car prices have been slipping for some time now, -4.25% in February.
Contrary to the building up of bubbles, the unwinding of them can be equally self-perpetuating. The dynamic of falling demand with rising supply creates a sort of feedback loop in which used cars and off lease inventory pile up, prices go down, equalling higher lease costs for consumers. This drags demand and prices down further. And on and on.
Will Declining Auto Sales Hurt The U.S. Economy?
Auto sales make up about 3% of the country’s GDP, a not-so trivial amount. But as Christian Drake points out on The Macro Show today, the peak in auto sales is generally "a mid-cycle phenomenon, not an acute harbinger of rollover risk" for the broader U.S. economy. You can simply eyeball this in the first chart of this post which shows the peak in auto sales around the mid-point in recent economic cycles.
Now consider what's happening in recently report U.S. economic data...
- Retail Sales recently hit a five-year high.
- Durable Goods and Capex for March both accelerated to up +5% year-over-year and +2.7% y-o-y respectively.
- Jobs Growth recently picked up for the first time in 23-months.
- Consumption: fourth quarter GDP was revised +10 basis points to +2.0% year-over-year with a positive +50 basis point revision to Consumption growth leading the upside.
- Corporate Profits ramped to +9.3% year-over-year. Recall this TREND of profits #accelerating comes after 5 consecutive quarters of negative year-over-year profit growth
The takeaway is very simple. We continue to argue that the U.S. economy is accelerating, despite falling auto sales.
