Automotive Diagnostic: Nascent Weakness Foreshadows Stagnation Ahead

Written by ITR Economics | May 9, 2024 2:08:51 PM

The monthly North America Light Vehicle Production numbers came in weak for March.

March Production numbers were down relative to February.
This is only the third time in the 2000s that March numbers came in lower than February.
The other two instances were 2020 (the onset of COVID shutdowns) and 2008 (the Great Recession).

A month of data does not constitute a trend. However, other reliable signals suggest that Light Vehicle Production is weakening.

The 12-month moving total (12MMT) ticked down slightly from February to March; the 12MMT trend has been relatively flat – i.e., stagnant – in 1Q24.
Production’s year-over-year growth rate, as measured by the 12/12 rate-of-change, continued to decline in March. The growth rate, at 8.0%, has been slowing since a July 2023 peak of 15.5%.

Trends are stronger in the retail side of the automotive industry, but they also suggest some softening.

The 12MMT for US Light Vehicles Retail Sales a measure of units sold rather than sales dollars, ticked slightly downward in April, and the year-over-year growth rate, currently at 10.6%, is declining further off a September 2023 peak.

It is also worth noting that both the North America Light Vehicle Production trend and the US Light Vehicles Retail Sales trend are below their respective pre-COVID levels.

While the consumer has generally exhibited resilience, contributing to relatively strong GDP despite interest rate pressures, trends in the US Auto Loan Delinquency Rate suggest some headwinds.

At 4.2% as of 4Q23 (the latest data), the Delinquency Rate – i.e., the percentage of US car loans more than 90 days delinquent – is up from a 4Q22 low of 3.73%.
The increase in the Rate suggests that more consumers are having difficulties in making car payments.
The Rate is still significantly below the pre-COVID level of 4.9%.

Elevated automobile prices have likely contributed to consumer headwinds. While US New Cars Consumer Prices have exhibited mild decline (three-month moving average basis) in recent months, the 2021–2023 run-up, precipitated by insufficient supply, was unprecedented in severity, as seen in the chart.

Meanwhile, inventory signals are mixed. The US Light Vehicle Month-End Inventory Days Supply been rising since mid-2022, when vehicle supply chain issues began easing. However, at 54 days’ worth of vehicles as of April, the Inventory Days Supply is still significantly below the pre-COVID five-year average of 68.7.

What It Means

Both the Delinquency Rate and Inventory Days Supply trends are favorable from a historical standpoint but currently moving in the wrong direction. If these headwinds continue, the automobile manufacturing industry will stagnate this year and into next. We are forecasting relative flatness, with a downward bias, for North America Light Vehicle Production through mid-2025. If you have exposure in this industry, your growth will have to come via market share gain.

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