While other industrial markets have risen, albeit mildly, during much of this year, the automotive industry has persisted in its decline.
- The North America Light Vehicle Production 12-month moving total (12MMT) was near a two-year low in June, the latest data.
- The June 12MMT was a slight tick-up from May, but such variations are common as “noise” in the Production dataset.
It is unlikely that June is the start of a takeoff for Light Vehicle Production. Interest rates remain elevated and, per our analysis, they are not likely to decline appreciably. Motor vehicle prices are elevated (though makers are taking measures to stem some of the increase, with GM and Stellantis reportedly absorbing some tariff-driven cost increases).
While consumer sentiment does not necessarily influence retail spending as a whole, it does matter when it comes to purchases of certain big-ticket, financed items such as cars, as seen in the chart below. It is likely that consumers will need to “feel better” in order to pick up their purchases in an industry characterized by financing and high costs.
There are other negative signals:
- The US Auto Loan Delinquency Rate (5.0%) is trending upward and currently about 0.8 percentage points above the trailing 10-year average. It is nearing Great Recession and COVID peaks.
- Ongoing malaise in the housing market further supports the reality that consumers are still wary of making big-ticket purchases that involve financing. If the government further ramps up tariffs that impact the auto industry, it could exacerbate this problem, ultimately leading to a longer downturn in Light Vehicle Production.
- Tariffs could also impact auto prices via supply chain issues.
It is not all bad news. We are seeing some positives that would support a lift in consumer sentiment and, eventually, rise for US Light Vehicle Production, which we expect to take hold around year-end.
US Light Vehicle Month-End Inventory Days Supply is exhibiting nascent decline.
- This indicator — a measure of how much inventory auto dealers have on hand — generally has an inverse relationship with Light Vehicle Production, and, unlike the Retail Sales trend noted above, it leads Light Vehicle Production by about three quarters. Declining inventory means that more cars are leaving dealers’ possession (via sales) than are arriving, typically a favorable sign for demand.
US Industrial Production is rising and projected to continue to rise.
- Our outlook for general Industrial Production rise in the years ahead is underpinned by the relative financial health of businesses and consumers (even if they are still wary of financed purchases at the moment), the amount of M2 cash circulating, and ongoing onshoring trends as businesses adapt to the political winds and seek to protect themselves from COVID-esque supply chain difficulties.
- A rising industrial economy is likely to lift consumer sentiment and their willingness to purchase cars. We expect the auto industry, as measured by Light Vehicle Production, to pick up around the end of the year.
Wage trends are strong.
- US Median Annual Earnings are rising at an accelerating rate, and the ITR Checking Points™ suggest the trend will persist. ITR Economics is projecting higher-than-normal increases in wages over the next five years. Consumers are more confident when they are earning more money.
The bottom line is that participants in this market should be prepared for rising opportunities, but they will come later than in other industrial markets. Follow ITR Economics for the latest insights on the auto industry and other key markets.