How long will US consumer demand keep up?
US GDP numbers released today show the economy grew at a 1.9% annualized pace in the last quarter. That follows a 3.5% pace in the quarter before. Not bad. But the question now is how long this will keep up. Declining auto sales might offer a clue.
Back in early 2014, we saw auto inventories building, even as the auto industry turned to subprime borrowers to sell their cars. The justifiable worry was that this presaged a massive inventory purge that would slow growth. I called growth then ‘middling’ and looked at 2014 as a transition year. But that was three years ago. And we have got through that period as well as a period of oil and gas capex falling through the floor. And growth is back.
Now the car problem is back though, with dealers hanging on to inventory of 85 days sales. They are being forced to discount heavily and the automakers are cutting production as a result of the supply problem.
I think we should flag this auto inventory problem just as we did in 2014 to see if it is a canary in the coal-mine. All of the macro figures look reasonably healthy in the US economy from job growth to wages to GDP growth to business and consumer confidence – you name it. What’s more, Trump is promising corporate and household tax cuts by August plus a bump in military spending. The data are supportive of continued growth.
If automakers successfully work off the inventories and the auto industry continues to prosper, it’s full steam ahead. However, if auto sales begin to slump, it will be a sign that the consumer is tired. And we should look for other signs of slowing consumer demand and slowing growth.