There are many who are questioning the narrative about the economy being so strong. We are seeing inventories build up in many areas. Just last month, both Walmart and Target pointed to a change in consumer buying. Basically, people are opting for the lower margin necessities while skipping that which fits into the discretionary category.
This is something that is likely going to continue.
Automobiles are one of the largest contributors to the economy. After all, there are a lot of cans of coffee or hamburgers in a $40,000 vehicle.
What we are seeing is getting very scary based upon the last few years.
Normal auto sales, on an annualized rate, is between 17M-18M. This is where we know the industry is strong.
Unfortunately, these are numbers not seen in a while. Before getting into that, this week saw the release of the May sales. There were 7 manufacturers that release their numbers (it is only mandatory on a quarterly basis).
Here is what took place from a year ago:
There is only one way to describe this: ugly.
Highlighted is the 5 month change from 2021. Notice how much of a decline we are seeing. Overall, there is a 20% drop from a year ago.
Of course, the industry wants to blame it on the supply chain issues. The challenge with this is there were serious concerns last year.
Are we witnessing demand destruction? Obviously we can't draw conclusions based upon one month. However, we are seeing a concerning trend longer term.
What is concerning is, other than a quick rebound after the COVID collapse, we have seen a decline in US auto sales since 2015.
Some believe the numbers are drifting lower due to the fact that consumers want electric vehicles. This is a theory of Cathy Wood, the head of Ark Investments.
Could this be a reason why the sales are declining? We know sales of EVs are moving higher. So, obviously, the loss is coming from ICE vehicles.
This might be a valid theory over a longer term but I doubt it is the case now. What we are seeing, in my view, is more a reflection on the economy than anything else. EV production is increasing yet it will be years before the output is there for it to be a serious percentage of overall sales. Thus, is most are putting off buying a new car in an effort to await EVs, it will be a long wait.
The reality might just be that the economy was not that strong over the last 5 years. We know 2018 and 2019 were causes for concern. The shortage in collateral has been taking a toll since the Great Financial Crisis. The lockdowns due to COVID sent the economy in a tailspin, something that it might have been on pace for anyway.
In spite of the rhetoric from those claiming the economy is strong (The White House and Fed), it really is not. We are dealing with a systemic issue that is likely to persist. For the time being, the Fed is tightening which will certainly cause some issues.
However, what the Fed is doing is not really going to affect much. The wheels were already in motion. Inventories saw record month over month change in twice in the 4th quarter. This has only spread throughout much of the economy.
Demand destruction was on way due to the higher prices. When the PPI consistently outpaces CPI, it means demand is going to get crushed. Manufacturers and retailers simply cannot pass on all of the price increase.
At the same time, essentials go up in price, leaving less room to take on debt. This is one factor in the automobile numbers. The other is the fact that mortgage refis have been dropping since last May. When people refinance their house, it is no uncommon for them to buy a new car with some of the money.
Whatever is going on, these numbers are of great concern.
If you found this article informative, please give an upvote and rehive.
gif by 
logo by 
