Friday, May 24, 2019

Merrill on the "Softening" Auto Sector

by Calculated Risk on 5/24/2019 08:52:00 AM

A few brief excerpt from a Merrill Lynch research note on the auto sector: Autos: lot full

In our view, the peak in auto sales is clear and we will likely see some softening going forward, but we do not expect a sharp drop. The labor market is still solid with a healthy pace of job growth and the emergence of wage inflation. Consumers are feeling increasingly confident about job prospects, which could encourage the purchase of a big-ticket item such as a vehicle. Absent a recession, auto sales will avoid the painful drop.

The slowdown in sales leads to excess inventory ... the excess inventory is largely concentrated in light trucks and SUVs and the cost to carry such inventory is high. Producers have started to respond, with motor vehicle production down 2.5% mom sa in April, marking the second drop in three months. There is likely more to come.

A weakening in the auto cycle will serve as a drag to the economy. … Motor vehicle output added an average of 0.2pp / year to real GDP growth from 2010 to 2018 after slicing a half of a percentage point in each 2008 and 2009. Motor vehicle production is already on course to be a drag this year, slicing 0.14pp from 1Q GDP growth. We expect it to cut nearly 0.2pp to annual growth this year. Relative to last year, that is a reversal of 0.4pp. It doesn’t feel great but it is manageable. A decline in output naturally means there is also a decline in jobs.
emphasis added
CR Notes: this is close to my view. As I wrote earlier this month: A small decline in sales this year isn't a concern - I think sales will move mostly sideways at near record levels.

This means the economic boost from increasing auto sales is over.

Vehicle Sales The graph shows light vehicle sales since the BEA started keeping data in 1967.

Note: dashed line is April estimated sales rate of 16.43 million SAAR.