Best of the Week
Most Popular
1.Spain Ignores Scotland Lesson as Catalan Independence Referendum Could Spark Civil War - Nadeem_Walayat
2.Used Car Buying From UK Dealer Top Tips, CarMotion.co.uk Real Customer Experience - N_Walayat
3.Spanish New Civil War Begins as Madrid Regime Storm Troopers Quell Catalan Independence Rebellion - Nadeem_Walayat
4.Virgin Media Broadband Down, Catastrophic UK Wide Failure! - Nadeem_Walayat
5.Are the US Markets setting up for an Early October Surprise? - Chris_Vermeulen
6.The Pension Storm Is Coming To Europe—It May Be The End Of Europe As We Know It -John_Mauldin
7.Stock Market Crash 2018; Will it Prove to be Another Buying Opportunity - Sol_Palha
8.The Profoundly Personal Impact Of The National Debt On Our Retirements - Dan_Amerman
9.Stock Market as Good as it Gets; Like 2000 With a Twist -Gary_Tanashian
10.1987 Stock Market Crash 30th Anniversary Greatest Investing Lesson Learned - Nadeem_Walayat
Last 7 days
Bitcoin Hits $6,000, $100 Billion Market Cap As Helicopter Ben and Jamie Demon Warn The End Is Near! - 22nd Oct 17
Time for Caution in Gold Miners - 22nd Oct 17
“Great Rotation” Ahead; Will it Be Inflationary or Deflationary? - 21st Oct 17
The Trigger for Volatility, Rates and the Next Crisis - 21st Oct 17
Perks to Consider an Agent for Auto Insurance - 21st Oct 17
Emerging Megatrends Hurting Consumers - 21st Oct 17
A Catalyst of the Stock Market Bubble Bust - 21st Oct 17
Silver Stocks Comatose - 21st Oct 17
Stock Investors Ignore What May Be The Biggest Policy Error In History - 20th Oct 17
Gold Up 74% Since Last Stock Market Peak 10 Years Ago - 20th Oct 17
Labour Sheffield City Council Employs Army of Spy's to Track Down Tree Campaigners / Felling's Watchers - 20th Oct 17
Stock Market Calm Before The Storm - 20th Oct 17
GOLD Price Creates Bullish Higher Low - 20th Oct 17
Here’s the US’s Biggest Vulnerability in NAFTA Negotiations - 20th Oct 17
The Greatest Investing Lesson Learned from the 1987 Stock Market Crash - 20th Oct 17
Stock Market Time to Go All-in. Short, That Is - 19th Oct 17
How Gold Bullion Protects From Conflict And War - 19th Oct 17
Stock Market Super Cycle Wave C May Have Started - 19th Oct 17
Negative Expectations, Will the Stock Market Correct? - 19th Oct 17
Knowing the Factors Affect your Car Insurance Premium - 19th Oct 17
Getting Your Feet Wet In Crypto Currencies - 19th Oct 17
10 Years Ago Today a Stocks Bear Market Started - 19th Oct 17
1987 Stock Market Crash 30th Anniversary Greatest Investing Lesson Learned - 19th Oct 17
Virgin Media Broadband Down, Catastrophic UK Wide Failure! - 19th Oct 17
The Passive Investing Bubble May Trigger A Massive Exodus from Stocks - 18th Oct 17
Gold Is In A Dangerous Spot - 18th Oct 17
History Says Global Debt Levels Will Lead to Another Crisis - 18th Oct 17
Deflation Basics Series: The Quantity Theory of Money - 18th Oct 17
Attractive European Countries for Foreign Investors - 18th Oct 17
Financial Transcription Services – What investors should know about them - 18th Oct 17
Brexit UK Vulnerable As Gold Bar Exports Distort UK Trade Figures - 18th Oct 17
Surge in UK Race Hate Crimes, Micro-Racism, Sheffield, Millhouses Park, Black on Asian - 18th Oct 17
Comfortably Numb: Surviving the Assault on Silver - 17th Oct 17
Are Amey Street Tree Felling's Devaluing Sheffield House Prices? - 17th Oct 17
12 Real-Life Techniques That Will Make You a Better Trader Now - 17th Oct 17
Warren Buffett Predicting Dow One Million - Being Bold Or Overly Cautious? - 17th Oct 17
Globalization is Poverty - 17th Oct 17
Boomers Are Not Saving Enough for Retirement, Neither Is the Government - 16th Oct 17
Stock Market Trading Dow Theory - 16th Oct 17
Stocks Slightly Higher as They Set New Record Highs - 16th Oct 17
Why is Big Data is so Important for Casino Player Acquisition and Retention - 16th Oct 17
How Investors Can Play The Bitcoin Boom - 16th Oct 17
Who Will Be the Next Fed Chief - And Why It Matters  - 16th Oct 17
Stock Market Only Minor Top Ahead - 16th Oct 17
Precious Metals Sector is on Major Buy Signal - 16th Oct 17
Really Bad Ideas - The Fed Should Have And Defend An Inflation Target - 16th Oct 17
The Bullish Chartology for Gold - 15th Oct 17
Wikileaks Mocking US Government Over Bitcoin Shows Why There Is No Stopping Bitcoin - 15th Oct 17
How to Wipe Out Puerto Rico's Debt Without Hurting Bondholders - 15th Oct 17
Gold And Silver – Think Prices Are Manipulated? Look In The Mirror! - 15th Oct 17

Market Oracle FREE Newsletter

3 Videos + 8 Charts = Opportunities You Need to See - Free

Why Slumping Auto Sales May Not Say What You Think They Say

Companies / US Auto's Aug 02, 2017 - 03:23 PM GMT

By: F_F_Wiley

Companies

July auto sales (released today and charted below) remained weak and should trigger a few recession forecasts. In fact, over the past few months we’ve read about half a dozen commentaries linking the recent plunge in auto sales to an imminent recession. And we understand the reasoning, but we’ve yet to buy into it.

We agree that car sellers face a degree of demand saturation while potential buyers suffer from credit saturation, or at least that’s what the data seem to show. We also agree that the saturation twins tend to be late-cycle indicators. But we’d like to add another possible explanation for slowing auto sales, one that yields a different conclusion about recession risks.


Our view is this: Maybe the sales slump isn’t so much an independent force that’s driving the business cycle but merely a substitution for other types of spending.

Think, for example, health care. Classifying health care as a “big ticket” item in the consumer’s basket (seems reasonable), it surely falls in the big three, alongside homes and autos. There’s only so much room in the average middle-class budget for those three items. Changes in outlays for one of the items can easily squeeze the other two. And we think we can demonstrate the sumo battle between health care and auto sales with two charts.

The first chart shows three separate instances of soaring health spending. (Note that the 2016 data for this spending category won’t be available until midway through the Bureau of Economic Analysis’ Annual Update; it’s due on August 11. Therefore, we estimated 2016 and projected 2017 using the narrower “health care spending” category, which grew over the past six quarters at a pace only exceeded in 2015. Our 2016 estimate could be too low, thanks to the insurance premium “shock,” but we won’t find out until next Friday, and we’ll add an addendum to this post at that time.)

The chart shows that the most recent jump in health spending growth, beginning in 2014, was even bigger than earlier episodes. Of course, 2014 was also the first year of Obamacare. In our view, it stands to reason that Obamacare’s cost effects should eventually prey on other types of spending. Also, the most vulnerable types are those that require large commitments that are difficult to shed, such as lease payments on new cars.

While that may sound speculative, history seems to support our theory. Our second chart (below) shows that the recent decline in auto sales, if it continues, would be the third consecutive instance of health and autos occupying opposite ends of the same seesaw.

And how do our charts relate to recession risks?

Well, the math suggests that any hurt felt by those in the auto industry is mitigated—at least on a whole economy basis—by good times being had by those working in health care, pharmaceuticals, and insurance. In fact, if we’re right about that substitution, it may even be a net positive for GDP. Consider that each dollar of auto spending scatters among producers of autos and auto components all over the world, whereas a dollar of medical spending tends to be felt more strongly in the United States.

So, if you haven’t yet traded your old RAV4 for a new 4Runner because you’re shell-shocked by medical premium increases, you may have recycled more of your income back into the domestic economy than you otherwise would have. And the additional income you’re applying to medical costs shows up in GDP, per the charts above. Unfortunately, it also eats into other types of spending. But that fact alone shouldn’t cause you to change your business cycle forecast from expansion to recession. When it comes to recessions, you might put more weight on indicators such as lending standards, which, if they deteriorate, would tip the scales against many industries at once. (Stay tuned—the Fed’s lending standards survey for the second quarter should be released by next week at the latest.)

And because we can’t close this article without some snark…

To be clear, we’re offering only a short-term business-cycle view, not an endorsement of our current health system. We’re not applauding large increases in premiums, co-pays, and deductibles. In fact, we’d be more likely to join the bleacher bums raining “boos” on the health spending boom’s unfortunate side effects. Make sure to include those side effects in the “unintended consequences” column of your Obamacare scorecard.

Better yet, considering that the insurance and “doc” lobbies crafted much of the legislation (see, for example, this book), the growing consumption share accruing to insurers and medical providers probably wasn’t unintentional. It might be more accurate to switch it to the “intended consequences” column. Either way, it’s one of a number of challenges that demand our attention as the nation continues to debate the curiously named Affordable Care Act.

F.F. Wiley

http://ffwiley.com

F.F. Wiley is a professional name for an experienced asset manager whose work has been included in the CFA program and featured in academic journals and other industry publications.  He has advised and managed money for large institutions, sovereigns, wealthy individuals and financial advisors.

© 2017 Copyright F.F. Wiley - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife