VIPs
- March vehicle sales of 17.5M units on a seasonally adjusted annualized rate were significantly higher than the 16.8M consensus expectation; favorable seasonals averted a third consecutive sub-17M pace
- The 17.5M headline conflicted with streams of negative news out of auto manufacturers; with the sole exception of Honda, auto manufacturers reported negative first quarter sales
- The seasonal flattery stemmed from Sunday sales in 68% of states not being factored in & March 2019’s one fewer selling day vs. last March equating to a 3.57% decline in days vs. a 3.1% sales decline; for the quarter, selling days were down by 1.3% vs. a 3.2% sales decline
- Auto analyst Daniel Ruiz pegs ytd inventory levels higher by 3.8% and warns that fleet sales masked retail weakness; manufacturing is the economic linchpin — when inventory is at this level, manufacturing declines at a faster pace than sales
- QI’s University of Michigan Auto Leader indicator is more bearish than seasonally-adjusted sales; further rises in jobless claims in auto-intensive manufacturing states is a risk if there’s continued capitulation in the dealer showrooms
“Early demand for Walt Disney Co.’s Avengers: Endgame tickets is crashing websites, underscoring predictions that it will deliver the biggest opening weekend of all time later this month,” is how the April 2nd Bloomberg article opened. Fans of the movie were so ravenous to score seats for the April 26th opening that online traffic at AMC Entertainment and Fandango couldn’t handle the rush to buy. If only the U.S. auto sector could garner such excess demand in the real world.
According to late afternoon Tuesday headlines, March vehicle sales blew away the 16.8 million consensus expectation, coming in at a 17.50 million seasonally adjusted annualized rate. The outcome relieved investors bracing for a sub-17-million rate for a third consecutive month, which would have been the worst streak since mid-2017.
Time to unleash the optimism for a bounce back in March retail sales? That was certainly stocks’ interpretation. The S&P 500 clawed its way into the green, closing up 0.05 points after trading down most of the day.
Never comfortable with discomfort, we were perplexed by the upside surprise. The data are what the data are, but the 17.5-million headline conflicted with the day’s relentless stream of subheads. Save Honda, the sales standout, one manufacturer after another reported negative sales for the month, or in GM’s case, the quarter.
As per The Detroit News, “Most automakers saw their U.S. sales decline in the first quarter as customers feel the pinch of increasing prices and rising interest rates.” Prices had already whittled away purchasing power. Edmunds’ addition that “Auto Loan Interest Rates Hit 10-Year High” of 6.36% in March, versus 5.66% last year pressured affordability further.
As for those subheads, the year-over-year comparisons from 2019’s first quarter for GM, Ford, Fiat Chrysler (FCA), Toyota, Nissan and Honda read as such, in the same order: -7.0%, -1.5%, -3.0%, -5.0%, -12.1%, +2.0%. (Ford officially reports Thursday, but a decline has been pre-reported.)
One bright spot was FCA’s Ram pickup truck. Cox Automotive analyst Michelle Krebs sagely caveated that FCA’s besting America’s number two selling truck, the Chevrolet Silverado, came at a price — hefty incentives that outpaced most other truck brands.
Blinders Off Research’s Daniel Ruiz tweeted for “folks, please take a seat, hold on to something, and forgive me for what happens next…the NEWLY redesigned Silverado is down by 15.7% in Q1!!!” The structural shift toward trucks and away from cars means that any data points on truck sales, inventories and production matter more for the broader macro outlook than the shrinking car side.
With all of this negativity in hand, we’re instructed to celebrate the 17.5 million SAAR? Forgive our indignation with the seasonal adjustment construct. March 2019 had 27 selling days, one fewer than last March equating to a 3.57% decline in days vs. the 3.1% decline in sales for the month, ergo the upside surprise.
Even accepting this, it’s the blue laws that made us blue in the face. Only 12 states impose absolute blue laws requiring dealerships close on Sundays; six restrict the number of Sundays. Somehow though, seasonal adjustments assume all 50 states close on Sundays — a flagrant flaw.
Let’s play by their rules for the quarter, which had 76 selling days to 2018’s 77. That puts selling days down by 1.3% to sales being off by 3.2% year-to-date with what Ruiz estimates to be inventories up by 3.8% and overall sales flattered by fleet sales masking the declines in retail sales.
On the most fundamental economic level, the numbers games and propaganda obfuscate the economics of what is playing out in plain sight. “Manufacturing is being pressured due to hefty inventories and declining sales” Ruiz warns. “When inventory is at this level, manufacturing declines at a faster pace than sales. The real story here is manufacturing!”
The other thing shrinking is household buying conditions for autos. On its own, this metric from the University of Michigan offers solid guidance for vehicle sales. But we decided to merge it with the holy grail of higher unemployment expectations (also from UMich), so it measures not just the pillars of prices and rates, but also a leader of unemployment trends — the last domino to fall in any auto cycle. We’re dubbing it the “UMich Auto Leader.” Smoothed out over a four-quarter average, it reliably flags major inflection points.
Right now, the UMich Auto Leader is more bearish than seasonally-adjusted sales. Capitulation in dealer showrooms risks further rises in jobless claims in auto-intensive manufacturing states. Six of the top 10 already are rising — Michigan, Indiana, Ohio, Tennessee, Kentucky and Alabama. The risk lies in the final four — Texas, California, South Carolina and Missouri. That would signal the endgame for the U.S. business cycle.