Plunge in Auto Sales, is it Cyclical or Secular?

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Car sales in America are rolling over at the fastest pace since the great recession.   There’s debate about whether the downshift is due to normal economic cycles or indications of secular or structural change.

Large auto makers – Ford, General Motors and Toyota, have reported meaningful sales contraction in the first half of the year.

Automakers are reporting substantially weaker than-expected sales for the month, with some companies posting double-digit declines in business.

General Motors sales fell 15.5 percent compared to July of last year when industry sales were close to a record high. While some of the decline at GM can be attributed to a deliberate pullback in fleet sales to rental car companies, the automaker’s retail sales at dealerships came in almost as weak, falling 14.4 percent. – CNBC

Forecasters expect US sales to fall to about 17 million this year – off 500,000 from last year’s pace.

Earlier this year we addressed these risks- The Bear Traps Report with Larry McDonald; A Turn in the Credit Cycle for clients.

U.S. Auto Inventory Build, 1970 – 2017

It’s clear – the inventory levels of unsold cars are at recession levels. As we can see above – unsold automobiles are piling up at the fastest pace since the great recession.   In recent years, sales growth was supported by unusually low borrowing costs and pent-up demand, as cash-strapped households delayed purchases during the economic downturn around 2009.  Credit growth is contracting in the auto-lending sector at the fastest pace since 2008 – this is having a big impact on sales.  On the other hand, as more Americans move to urban areas – the Uberization of transportation is creating significant structural challenges to the U.S. auto industry.

 

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