Well, it’s probably safe to say that any risk-off behavior we see manifested in a bid for the yen and Treasurys will be promptly attributed to geopolitical headline risk for the remainder of the trading week.
Indeed with all the “war” headlines (e.g. North Korea and Syria) it would be easy to forget what had everyone spooked from the word “go” this week. Namely lackluster US auto sales and what that presaged for the economy and in turn for the reflation narrative.
Those in need of a refresher are encouraged to review the following for the latest:
- Goldman’s Hatzius: “Unpleasant Trend” In US Auto Market – And Uber/Lyft Will Make It Worse
- Goldman “Unmasks” The Culprit Behind US Auto Loan Delinquencies
- 4 Charts Show The US Auto Bubble “Slamming On The Brakes”
So lest we should lose track of the fact that there’s a $1 trillion+ bubble bursting behind the scenes amid what promises to be a truly frantic bout of Syria headline hockey, we thought we’d take a few minutes to present the following bit from BofAML who notes that the US may be headed for a “car crash.”
Warning signs for the auto sector. Auto sales tumbled to 16.5 million saar in March, considerably below the consensus expectation of 17.3 million and the weakest pace since February 2015 (Chart 1). This prompted our team to reiterate their cautious view on the sector and warn about downside risks. They are concerned about bloated inventories, particularly for used cars, which have already led to a decline in prices, as well signs of stress in the auto financing market. Given the growing risks in the auto sector, we think it is prudent to understand the linkages to growth and inflation.
Measuring the influence. Autos (as measured by motor vehicle output) make up 3% of GDP, which is down from 3.2% in the early-2000s expansion and 4.2% during the late-1970s cycle (Chart 2). If we narrow the focus to the consumer, it makes up 3.7% of PCE (personal consumption expenditures) and 4.2% of core PCE. For CPI, autos – which show up as new and used vehicle prices – make up a total 6.5% of headline CPI and 8.3% of core CPI. Autos influence GDP through consumer spending and production, with inventories serving as the residual between what is produced and sold. During turns in the business cycles, there will be particularly large swings in auto inventories as manufacturers try to adjust production in response to dramatic shifts in demand (Chart 3). During the Great Recession, the contraction in autos served as a 0.5pp drag in both 2008 and 2009, but then added 0.5pp to GDP growth in the first year of the recovery. However, over the past 6 years, motor vehicle output has been a fairly modest contributor to economic growth, adding 0.2pp on average.
Simulations. Our team has a baseline forecast for auto sales to total 17.9 million saar this year, which implies that autos will provide a small 0.1pp bump to growth this year. Given downside risks, we run three alternative scenarios – sales falling to 17, 16 or 15 million this year – and show the results in Table 1. Under the benign case of 17 million, autos would have a relatively neutral impact on real GDP growth this year. Under the more extreme scenario of 15 million, real GDP growth would be dragged down by 0.4pp. Of course, this only accounts for the direct hit to the economy. There would be incremental pain from spillovers into auto-related parts production, transportation and trade. Moreover, such weakening in auto sales would be an indication of broad-based deterioration in consumer sentiment, which could ripple through the economy.