Thursday, May 5, 2011

Autos Stalled?

The Lehmann Letter (SM)

Yesterday the Bureau of Economic Analysis of the US Department of Commerce released its April estimate of new-vehicle sales:

(Scroll down to "Motor vehicles," open Excel spreadsheet and go to “Table 6” at the bottom.)

New-vehicle sales have grown strongly over the past year, breaking out of the 11 million range and climbing to 13 million. The chart shows that these figures continue the strong upward trend from less than 10 million in the depths of the recession.

New-Vehicle Sales

(Click on chart to enlarge.)

Recessions shaded

But the latest numbers provide cause for concern. Sales were 13.4 million at a seasonally-adjusted annual rate in February, 13.1 million in March and 13.1 million in April. That's a break in the upward trend.

It's tempting to ascribe the halt to lack of product from Japan due to the recent earthquake and tsunami. But the data don't bear this out. Both domestics and imports have been flat since February. (See Tables 1 and 4 in the source.)

Several more months of data are required before we can determine if we have reached a plateau or a temporary halt in an upward trend. If this truly is a plateau we are in trouble. The economy's continued advance depends upon strong gains in residential construction and new-vehicle sales.

Residential building has been flat and shown no signs of recovery. New-vehicle sales were a bright spot, part of manufacturing's uptrend. If auto sales stall now and don't reach the 15-million line in the chart, the economic expansion is in deep trouble. The economy can't keep growing at an adequate pace without a strong performance by residential building and autos.

What could be wrong? In a word: Households' balance sheets remain in a state of disrepair. The recession's wounds have not healed. Consumers have too much debt and too little liquidity. Their net worth has shrunk. Those who own stocks have had a good bounce over the past couple of years, but millions of homes remain underwater and weak home prices prevent many from purchasing a new car.

Households must reduce their debt and build their liquidity in order to repair their balance sheets. But borrowing and spending to buy a car reduces liquidity and boosts debt. That illustrates the great tension in our economy today: We must reduce our debts to repair our balance sheets, but we have to borrow and spend in order to stimulate the economy. Clearly we can't do both at the same time.

That's why auto sales remain an important indicator of the economy's direction. They tell us how consumers feel about their financial strength. If auto sales have reached a plateau and homebuilding remains flat, the economy cannot expand at an adequate rate.

(The chart was taken from [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2011 Michael B. Lehmann

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