Rising Car Inventories Are A Risk

Wolf Richter published an interesting article recently: The Next Tire To Drop On The States of America Economy. In it, he discusses ominous indicators for the futurity of U.S. auto production...



He writes,

The devastating crisis inward the manufacture was caused past times years of overcapacity, overproduction, steep rebates, hollowed-out residuum sheets, bloated inventories, together with a host of other problems that all of a abrupt came inward contact amongst crashing sales. This sense taught the manufacture to non e'er lose sight of that vaunted “discipline.” The manufacture would never i time again live blinded past times exuberance. But that lesson has already been forgotten. 

My default forecast for the U.S. economic scheme inward 2014 is fairly bland - continued growth, in all probability slightly faster than was the representative for 2013. But that is non maxim much - increment slowed to a crawl lastly year. Less financial drag should permit increment to recover.

The primary adventure to this baseline forecast is the possibility of a recession. (I recall the automatic stabilisers volition forestall the economic scheme from overheating for a considerable time, removing the other tail to the adventure distribution.) The Auto sector appears to me the highest profile potential trigger for recession, every bit an inventory correction volition convey a pregnant impact.

The nautical chart at the meridian of this article shows the U.S. Auto Inventory/Sales ratio, from the Bureau of Economic Analysis. The latest figure is for November, where the ratio stood at 2.53. Since this figure is based on monthly sales, the interpretation of that ratio is that it way that ratios stand upwards for 2.53 months of electrical flow sales.

Please banking corporation annotation that I create non know whether that inventory figure includes auto dealer inventory (the numbers quoted inward the Richter article imply higher figures, but I create non convey the information he refers to). Since auto dealers are independent of the manufacturers, autos are considered sold past times the manufacturers i time they are purchased past times a dealer, non a concluding customer.

Keeping that information doubt inward mind, the BEA inventory/sales ratio does non nonetheless seem to found grounds for immediate panic. It is relatively high (ignoring the spike that occurred during the financial crisis), but it had been at these levels earlier (such every bit during 2003-2004). However, production may bespeak to live throttled dorsum at simply about betoken to maintain this ratio from ascent whatsoever higher. If at that spot are other negative factors that striking the economic scheme at the same time, recession could easily result.

I convey simply started to write for the populace domain, together with I create non desire to commence amongst a blown recession call. Therefore, I create non convey a formal forecast close a recession, either pro or con. However, it seems condom to nation that autos stand upwards for a pregnant tail adventure to the U.S. economy, together with the sector needs to live watched carefully. (The other pregnant source of tail adventure that I meet originates inward the Emerging Markets. I create non follow those economies plenty to know whether the electrical flow turmoil is simply the commons volatility nosotros convey come upwards to expect, or the starting fourth dimension of a to a greater extent than ominous trend.)

(c) Brian Romanchuk 2014