By Profit Confidential
Suddenly, the automotive sector is red hot. According to Autodata Corporation, 1.4 million cars and light trucks were sold in the U.S. economy in the month of June. In fact, auto sales in the U.S. economy have increased 9.2% over the same period a year ago, and they are on pace to have their best year since 2007. (Source: Wall Street Journal, July 2, 2013.)
Since the beginning of the year, 7.7 million cars and light trucks have been sold in the U.S. economy.
But is that proof there’s real economic growth? Should we break out our “Dow to 20,000” party hats?
Based on our opinion, those numbers represent a good step in the right direction for the U.S. economy. Traditionally, auto sales figures are a strong indicator of consumer spending. The current trend indicates that Americans are spending money again. But there are a few reasons why I remain skeptical about any real economic growth in the U.S. economy.
The first reason is that according to TransUnion Corp., a credit information company, in the first quarter of 2013, the delinquency rate on auto loans 60 days or more past due increased from 0.82% a year ago to 0.88%.
Even more troubling is the fact that sub-prime borrowers—individuals with lower credit ratings—made up 15% of all auto loans made during the first quarter of 2013. (Source: MarketWatch, June 25, 2013.)
Could we see a sub-prime auto loan crisis in the U.S. economy? It’s not impossible. Over the last two years, balances in accounts from sub-prime auto loans borrowers have increased 11%.
The second reason is that consumer spending, aside from autos, is still very much suppressed in the U.S. economy. And the jobs market report from June showed that the number of people working part-time increased, with the majority of the jobs created in the low-wage sectors. That’s not likely to be a force that drives the U.S. economy towards economic growth.
And finally, while we have already heard enough about how the Federal Reserve will be stepping away from its quantitative easing, it will have a profound effect on interest rates. As I have said many times in these pages, the housing market in the U.S. economy will suffer as lower-wage earners will be faced with higher mortgage costs. And auto sales will be no different; just as it will become more expensive to buy a home, it will become expensive to buy a car.
In the short term, I expect automakers in the U.S. economy to continue to profit from this increased demand created by easy monetary policy; but in the long run, their troubles will become more evident. For example, the eurozone is still a mess, and China’s economic growth continues to become less stable.
Of course, basing your opinion on economic growth on one number—like auto sales—is not advisable when other indicators are suggesting the opposite.
Article by profitconfidential.com
