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Next Domino To Fall: Inventory Glut Plagues US Auto Sector, New Prices Plunge In July

China, Europe, and India, some of the world's largest industrial hubs for automobile manufacturing, have shuttered factories, laid-off workers and reduced average workweek hours, all due to an industrial slowdown that originated in the Eastern hemisphere in late 2017, early 2018. The industrial downturn has spread from East to West, now infecting the US economy.

So far US auto manufacturers have weathered the synchronized slowdown, but in a new report by Reuters, headwinds for the industry are starting to mount in 2H19.

Federal Reserve data shows auto vehicle and parts production was up 3.7% in the three months from May to July YoY. This is far better than the rest of manufacturing was down by 0.3% in May-July YoY, which was the fastest rate of change to the downside since Sept. to Nov. 2016.

Reuters noted growth rates in the auto industry started to come under pressure in 2H18 and 1Q19, but output, employment, and sales ticked higher by the end of April thanks to lower interest rates and springtime buying.

Dealerships for the last several years have been able to boost vehicle prices to levels that could soon be considered resistance among consumers.

New vehicle prices climbed 1% from March to May YoY, the fastest YoY increase from Sept. to Nov. 2013.

But it seems prices have hit a barrier by mid/late summer, outpacing wages, as the consumer starts to pull back.

The University of Michigan's monthly survey of consumers found that the number of people saying "it's a "bad time to buy" a new car because "prices are high" has been increasing this summer.

Vehicle sales have since stalled in the three months May to June YoY, according to the US Bureau of Economic Analysis.

An auto glut is starting to form with dealership inventories at 1.77 months of sales in June, up from 1.55 months in the same month a year ago.

This has resulted in dealerships holding older model years and are resorting to more price discounting to clear excess.

"The inventory glut reflects a continued cooling of the US auto market," according to the Wall Street Journal ("Dealers dangle deals to move outgoing models," WSJ, Aug. 16).

"Sales remain relatively healthy, but auto makers haven't adjusted their production schedules quickly enough to account for slowing demand, leading to a backup of outgoing model-year vehicles."

Reuters said new vehicle prices and discounts plunged in July as dealers were attempting to clear inventory. Because of the glut, manufacturers could slow production in the coming quarters, resorting in loss of hours worked, layoffs, and or shuttered factories.

"If growth in auto manufacturing slows or turns negative, it will have a knock-on effect throughout the supply chain and on employment," said Reuters senior commodity analyst John Kemp.

The auto industry accounts for about 3 – 3.5% of overall US GDP, is a major contributor to all fifty states economies and employs millions of jobs.

If the next domino to fall is the auto industry, this would be more bad news for the Trump economy heading into the 2020 election year.

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