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Automotive Sector: Pickup in Activity Likely in 2020

November 1, 2019

ITR President and Speaker Alan Beaulieu discusses current and upcoming economic trends in the automotive sector.

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Transcript by Rev

Alan Beaulieu:
Hello everyone, this is Alan Beaulieu, I am the President of ITR Economics and I'm happy to talk with you today in this issue of TrendsTalk.

There are a lot of things going on in the economy and some of them are bedrock and some of them are new technologies. There's all kinds of changes going on because of external, rather non-economic events, think Boeing. But today I want to talk to you about a bedrock segment of the economy, the automobile industry.

You know there are a lot of businesses tied, whether you're a tier one, tier two, tier three supplier, a parts distributor, whether you're providing contract labor, whatever it is that you're doing, for most of us, in some way has some bearing.

I know on the auto industry, or is related to the auto industry, I know a large number of our clients are selling equipment, machinery, oils into that industry. And what happens there matters. And it matters to all of us in the larger economy too.

I want to talk to you about that today because the automobile industry, and the recent GM strike has called people's attention to it. Well, we know the strike is over and that's good news for lots of people, one would assume. But what about for the US economy, what's going on there?

Well, it begins with automobile retail sales. Automobile retail sales are below year ago levels. It's a really slim 0.6% below year ago levels. Technically in a Phase D right now, which means that number is going to get larger in a negative fashion. So, further below year ago levels through the near term. But the 3/12 is at 0.7% above year ago levels. It's an uneven rising trend, but we'll peg it into Phase B and hope it stays that way, it's a bit early.

The amount of automobiles being sold stands at 17,081,000, it's a healthy number. It's rising ever so slightly. And I do mean ever so slightly off of the June 2019 low. Think of it more in terms of a broad trough forming, that would be more accurate. But the good news there is that the quarter to quarter decline in automobile retail sales, so from June to September decline, was milder than normal. Got to like milder than normal. That means that the sales were better than last year. The dropping was better than last year. It means that we have ... the amount of sales coming in is slightly above last year. I mean, it's a reason to look for light at the end of the tunnel if you're related to this industry.

Certainly the domestic manufacturers are in a pretty good place right now. They're at 0.4% above year ago levels. And rising, more or less, in Phase B. Your 3/12 is 1.4% above year ago levels, 3/12 above a 12/12, that's a checking point in this world of ours at ITR. And that means more upside potential than not.

And so the amount of units being sold that are produced domestically is ... well, in the latest month, September, just slipped slightly off of a two year high, but the rate of change suggest that's just a little noise, not the beginning of a declining trend.

I submit to you that the domestically made automobiles, we'll be seeing some stability through the near term and then some mild rise as we push further into 2020. And domestically made automobiles sold in this country account for 77.5% of all the automobiles sold in this country. So it's a large portion and therefore to be paid attention to. It's in a pretty good spot right now. Not great, but at least it's in a Phase B, more or less, positioning.

Foreign made automobiles retail sales are declining at 4.2% below year ago levels. The 12/12 may be beginning a rising trend into Phase A off of a June 19 nine year low. It's tentative at this point, 3/12 is indicating it might be. But the amount of foreign made retail sales units are 3.8 million are at a three year low, 39 months to be specific. So, not faring as well as the domestically made product.

And of course, which brand you're related to makes a big difference. Ford, for instance, is 4.6% below year ago levels. While, Honda is barely below year ago levels at 0.8%. GM and Honda both have 3/12s that are in positive territory. Ford is not. So who you're selling to, the platform that you're on, certainly makes a difference.

Hybrids are doing well, I don't want to say that they're not. Although in September they too have slipped off of an August, 2019 record high. The 12/12 is at 24.4% when in Phase C. 3/12 is below that. So we still have some downward pressure on hybrids. And hybrids in total make up 4.4% of all retail sales. So it's not a large portion of retail sales, but if that's your platform, if that's where your parts or your activities or your service is going, then I would expect that you're going to see some more softness through the near term. But that should change in the second half of 2020.

Now I've mentioned that a couple of times, change in the second half of 2020. Why do I say that? Well, essentially because consumer activity is suggesting that we're going to see things improve in 2020. These are early turning changes, but I find them to be quite encouraging. They're not at the point yet where we want to hang our hat on them, but they are certainly encouraging.

And the first one would be retail sales itself. Retail sales leads the automobile retail sales figure, the 12/12, through a low by three months. It has a correlation of 0.82, and right now retail sales are looking pretty good. The rates of change have moved higher. The 3/12 is rising above the 12/12, positive ITR checking points in place. We have a nice seasonal rise in place.

So, despite the noise that you may have heard about the September number, and there are a couple of news outlets kind of saying it's a sign of really bad times ahead. Overall, in context, not to worry about the September number. The September figure itself came in above year ago levels. The 1/12 is above the 3/12 which is above the 12/12. All good, and we're looking for more upside pressure in retail sales, it's not going to be gangbusters, but we will be above year ago levels for Christmas. We'll have that white Christmas we all want.

And then things will slowly improve as we move through 2020. And as that continues, as you read in the ITR Trends Report or the ITR Insider, as you follow other blogs or other pronouncements from ITR, just pay attention to the retail sales number. And when we talk about the rate of change, as that continues to move higher, if it continues to move higher, then that certainly means good things for the industry that we're examining today, automobiles.

Now when we look at housing, we find another indication of good news, a good feeling for automobile retail sales, and that's automobile production, as we go into 2020. Housing starts have a correlation of 0.8, a very nice number indeed, but the timing relationship is coincident. So it's especially important to note then that the 12/12 has just notched higher for one month in housing. Single family housing starts in particular. The 3/12 is rising above that and it's rising above the zero line. The 12 month moving total has stopped declining. So housing is giving us a real early, it's a tentative look, but it's a affirming look at what we should expect as we look at how automobile retail sales, as we're headed through the rest of this year and into 2020.

So, there are two early signs, but they begin somewhere, when you have to begin to look for the light, and it's always dim at first, but it'll gain in brightness. Pretty soon our ITR leading indicator will turn the corner and others will also turn the corner in terms of signaling more rise in automobile retail sales and thus automobile production. Right now automobile production is flat. It's even with year ago levels on a 12/12 and a 3/12 basis. But expect some mild rise as we move forward.

It's certainly a lot of automobiles still being made. A lot of automobiles mean that there is still machinery, there's still lubricants, there's still lots of activity going on in the automobile industry. But for those looking for growth, that growth is going to be coming in the second half of 2020, and it'll be fairly mild as we go forward. And as I'm sure you know, light duty trucks are outperforming passenger cars, and are likely do so in 2020 as well.

One of the things I would caution you not to look at is consumer expectations. I find still as I travel, that's a very popular thing for people to talk about, as if it has some bearing on the economy and they can plan around it. I would suggest you not do that. Consumer expectations on a monthly basis are not helpful. Consumer expectations on a 12/12 basis have a greater validity. But even in this case, when it comes to automobile retail sales, the correlation is not helpful at that 0.53. It does lead by seven months, but with a correlation of 0.53, I don't even look at it. And I would suggest that you do the same.

Ignore consumer expectations, look at what consumers are doing. And what they are doing is beginning to buy homes, pending home sales rates of change is improving. Existing home sales rates of change is improving. New home sales rate of change is improving. So housing starts are beginning to improve. Retail sales moving up.

So what the consumer is doing is telling you that the tough times, or the more challenging times, that we've had of late in automobiles, this flatness, is coming to an end. And we should be expecting some upside activity as we head into 2020, especially in the second half of the year.

Look for the positive signs, they're there. Track these indicators, track the leading indicators, and I think you'll see that the positive momentum builds.

Thank you for joining me today. Have a great day.

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