Friday, June 1, 2012

Car sales disappoint, but remain very strong


May sales of autos and trucks came in below expectations (13.7M vs. 14.5M). That makes a total of five series released today—all traditionally volatile on a month-to-month basis—that have been weaker-than-expected (payrolls, unemployment, manufacturing, construction, and auto sales). It's a "perfect storm" of weak news coming on a Friday, amidst escalating tensions in the Eurozone, and so it's no wonder the market sank.

But back to autos. In the past three years, auto sales have risen at an annualized rate of no less 11.7%, even counting May's 4.5% decline from April. That's weak? On the contrary, we have just seen two years of fabulous, double-digit growth in a sector of the economy that was fighting for its life just threee years ago. No one would have dared predict back then that sales would be this strong today.

In any event, the larger trend (see chart above) is much more important than the month-to-month fluctuations. It's very important to remember that the reported number is a seasonally adjusted annualized sales rate, so a rather small change in actual monthly sales, or a slight error in the seasonal adjustment factors, can result in big swings in the reported number. If you were to extrapolate each monthly swing in this series into the future and trade on that basis, you would be whipsawed to death inside of one year.

Going into today's releases, this market was on tenterhooks, fearful that the economy was on the verge of sinking into another recession. It could be mere coincidence that five series came out on the weak side of expectations, or it could be that the economy has lost some forward momentum. It's also important to reflect on the approaching fiscal cliff, which as Larry Kudlow notes is contributing greatly to the market's unease:

If all the Bush tax rates go up, incentives will go down and liquidity will leave the system. You can’t pick up a newspaper these days and not find a story about how the fiscal cliff is elevating uncertainty and slowing U.S. growth. House Speaker John Boehner asked Obama for help in extending the Bush tax cuts this summer. But Obama said no. Instead, he wants to raise marginal tax rates on successful upper-income earners, capital gains, dividends, estates, and many successful corporations.

Where’s the corporate tax reform that would lower rates and broaden the base and end the double-taxation of the overseas profits of American companies? A business tax cut would help enormously, but it’s nowhere in sight. Obama is too busy trashing Bain Capital profits and Romney’s business career, both of which, by the way, have recently been praised by former president Bill Clinton. (It was Clinton, you might recall, who lowered investment taxes and presided over an economic boom.)

The larger trends, however, remain intact: jobs are growing, incomes are rising, sales are rising, layoffs are declining, manufacturing is doing pretty well, and residential construction has turned up after 5 years of decline. The economy doesn't change on a dime, and not even 5 disappointing reports in one day can disprove that.

18 comments:

Unknown said...

Is the Eurozone economy bottoming out?

Eurozone industrial new orders

Even the PMI's of the PIIGS look like they've bottomed out - except maybe Spain.

It looks sort-of like a lengthy-but-shallow recession situation in the Eurozone, except for a few real basket cases like Greece which is obviously in a depression.

steve said...

seriously? is your head in the sand? have you looked at a HY credit spread chart? only in summer 98, fall of 08 and last fall did it look similar. batten down the hatches. treasuries are telling us we're at economic armagedon.

Rob said...

Scott, I hate to say it but reading this interview (Vhttp://online.barrons.com/article/SB50001424053111904370004577390023566415282.html#articleTabs_article%3D0) with Ray Dalio, the highest-earning hedge fund manager, has made me wish I was reading his blog, if he had one, and not yours. He is an arch-capitalist and yet he is able to see things in a much more nuanced way than you, eg the need for printing money (he expects more from US government). Equally, he is much more wary about the global economy going forward, because of the unknown Euroland factors. Here is someone who makes billions a year and yet doesn't just keep repeating that everyone else is too pessimistic ! Eg again, US government bonds - he bet on their shrinking yield and is now "neutral" but still sees no imminent increase in their tiny yields. I really think I have to stop reading your blog, it's been addictive, what with all your graphs and charts, but your message is just too simplistic. Right now you are once again way off in some of your calls, most notably US Treasuries.

John said...

"(It was Clinton, you might recall, who lowered investment taxes and presided over an economic boom.)"

Clinton kept capital gains rates at 28% until 1997 when he agreed to lower them to 20%. Clinton had a robust economy.

Bush cut capital gains to 15% and the economy lagged. He and Greenspan tried to stimulate with easy money and a housing bubble.

Let's go back to 20% and do something about that "ficscal cliff."

NormanB said...

Car sales are not 'very strong'. They are up due to a dearth of previous car sales but still modest.

Rob said...

Scott, this is what I mean by "more nuanced": (I tried putting key words in bold but the HTML thing wasn't working)

Eg: "We are now neutral on bonds. Over the next couple of years, long-term bonds will be a poor investment because the government will print money to leave real interest rates low. It doesn't mean that bonds will go through a big price selloff anytime soon. It's more likely the yields provided will be too low relative to inflation and growth to provide an adequate return."

Eg: "I believe the ECB will print money, and that will most likely alleviate concerns and produce another rally in stock and credit markets. But this is a tougher time to be very confident about that scenario."

Eg: "Deleveragings go on for about 15 years."

Eg: "Certainly, the peripheral countries in Europe will be in depressions, and there will be high unemployment. But if it happens in an orderly way, which I think is most likely, the repercussions for the world economy won't be intolerable ... [However] there could be a shock. I would say that there is maybe a 30% chance in the next six-month to two-year period of a really bad shock from Europe. And that shock is made worse because there is no clarity of who has got authority or control."

Eg: What makes all the difference between the ugly and the beautiful [delevering]?

The key is to keep nominal interest rates below the nominal growth rate in the economy, without printing so much money that they cause an inflationary spiral. The way to do that is to be printing money at the same time there is austerity and debt restructurings going on.

Henry H said...

There are 3 huge spikes of $20+ mil around '86, '02, and '05.

Are these spikes related to previous government stimulus measures?

John said...

Some say things are getting better, others say worse. Big corporations are making record profits. I say things will stay about the same.

skydude said...

Your last paragraph explains, almost perfectly, why I will most likely be voting for Obama in November. That's ironic.

Great insights as always!

Dr William J McKibbin said...

Hi Scott, you said that "...jobs are growing, incomes are rising, sales are rising, layoffs are declining, manufacturing is doing pretty well, and residential construction has turned up after 5 years of decline." Sounds like the current administration is pulling through afterall. Let's hope that Gov Brown can turn California around in time...

Dr William J McKibbin said...
This comment has been removed by the author.
Dr William J McKibbin said...

PS: Deaths around the Mediterranean Basin are already numbered in the tens of thousands -- my fear is that instablity in Europe will take the casualty count to the next level (as in hundreds of thousands) -- the US needs to take note of what is happening in Europe and prepare accordingly -- bringing home our troops from overseas postings may be a necessity in order to quelle violence and protect private property from rioters and derelects -- the choice of massive tax increases and/or massive spending cuts in California is a recipe for civil unrest along the US west coast...

William said...

Merkel Rejects Debt Sharing As Obama Urges Europe Action

It's worth paying close attention to Merkel's actual quotes in this article - not so much the other commentary.

http://www.bloomberg.com/news/2012-06-02/merkel-rejects-debt-sharing-as-obama-urges-end-to-crisis-cloud.html

Don Harrison said...

Scott, With all the worry in the air right now about another recession, might be wise to run your "Real Yields vs. Yield Curve Slope" chart to give your readers an updated view of one of the historically most reliable indicators of an impending recession.

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John Smith said...
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