Autos Expose Economy’s Fragility As Credit-Compelled Car Sales Continue To Collapse

Authored by Danielle DiMartino Booth via Bloomberg.com, 

The revival of the auto industry drove the factory sector out of recession; the flipside doesn’t look promising.

Federal Reserve data released last week on July industrial production offered little more than more of the same. Despite post-election optimism for a rebound in activity on the nation’s factory floors, the data reveal a continued throttling down in the growth rate to just over 2 percent compared with this time last year.

The main drag on activity — the auto sector — should come as no surprise to investors. Rather than rising by 0.2 percent over June as projected, manufacturing production contracted by 0.1 percent, marking the third decline in five months. Motor vehicles and parts production fell by 3.6 percent on the month, taking the year-over-year slide to five percent.

Blue Line: IP Manufacturing, Growth Y-o-Y%… Red Line: IP Manufacturing Ex-Motor Vehicles and Parts, Growth Y-o-Y%

Evidence continues to build that a sampling error may be to blame for the surprising strength in June and July car sales. Inventory continues to pile up, suggesting more production cuts are in the offing: As of June, the latest data on hand, auto inventories were up 7.4 percent over last year, leaving manufacturers choking for air. In July, General Motors Co. alone was sitting on 104 days of supply, well above its target of 70 days. Industry-wide, the July/August average of 69 days ties the August 2008 record and sits above the historic average of 56 days of supply.

In all, automakers have 3.9 million units of unsold light vehicles, up 324,600 from last August and the highest on record for the month. For context, July and August tie for the leanest stock levels of the year.

The decline in July sales was already the steepest this year. Fresh loan delinquency data suggest more pain ahead. “Deep subprime” borrowers have been a big boost at the margin, propelling back-to-back record years of sales in 2015 and 2016 as lending standards loosened sufficiently to allow millions with credit scores below 530 to access financing.

Equifax, the consumer credit reporting firm, didn’t hold back in its second-quarter update, saying the performance of recent vintages of deep subprime loans was “awful.” While industry insiders are quick to point out that the overall pace of defaults across all borrowers remains in check, up just marginally over last year, there is growing concern that deep subprime delinquencies are back at 2007 levels. “The bottom line is excess auto inventories are clearly evident and the auto sector is now in recession,” said The Lindsey Group’s Peter Boockvar.

Boockvar’s conclusion raises the question of what’s next for the broader economy. Downside risks are on full display when viewed through the prism of manufacturing net of motor vehicle and parts production. The revival of the auto industry drove the factory sector out of recession; the flipside doesn’t look to be promising. As one economist quipped at the sight of the following chart, “It looks like it’s time to get out the gray crayon.”

IP Manufacturing Net of IP Manufacturing Ex-Motor Vehicles & Parts – Y-o-Y % Change

A deeper question yet is what the implication is for long-term economic growth if credit-compelled sales continue to push the economy in and out of recession, as was the case for home sales in the last cycle and looks to be increasingly the case for the auto sector in the current cycle.

A recent analysis by The Liscio Report, an economic consultancy, dug deeper into the long demise of the private sector’s investment in the economy. Their findings:

At 2.1 percent of GDP, net fixed investment by the private sector is just over half its 1950 — 2000 average of 3.8 percent. At 1.0 percent of GDP, investment in equipment and software, which has long been identified with long-term productivity growth, is more than a third below its average over the same period of 1.6 percent.

The latest political turmoil suggests a further dampening in animal spirits in c-suites across America. That only underscores the need to switch the focus to infrastructure spending.

Infrastructure investment is supported on both sides of the aisle. No politician likes to run for office with the economy in recession. With the midterm elections just over the horizon, it would seem the imperative to set aside differences at this juncture are that much greater. For the sake of an economic jumpstart, it might be as simple as making America’s highways and byways passable again.

via http://ift.tt/2vpEl8a Tyler Durden

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