Automakers need strong sales month to clear record inventories
INSIGHT ARTICLE |
In March, auto inventories jumped to over 90 days’ worth of cars and trucks on hand, the highest since 1989. Figures in mid-April put the days’ supply a bit lower at 73 (see table), but the days’ supply of cars for the three largest automakers (General Motors, Ford and Fiat Chrysler) alone stood at 89—the tenth consecutive month above the market-clearing equilibrium of 65 days. Adding trucks to the data puts the Detroit automakers’ days’ supply at 87, the nineteenth-straight month above equilibrium.
This puts the auto sector at risk for a correction, which could have an impact on other sectors in the manufacturing industry, particularly in petrochemicals.
If auto sales do not materially pick up in May and June, there may be a significant pullback in overall industrial production in the second half of the year.
Given the intention of the Federal Reserve to hike the funds rate twice this year—and its signaling of plans to draw down the balance sheet—there is a strong probability that the U.S. dollar will appreciate noticeably, creating competiveness issues later this year.
Automotive News and Bloomberg, among others, have noted that swelling inventories have compelled automakers to increase incentives to drive growth and cut back on production in some plants. Some dealers have had to rent extra space to store the excess inventory.
Loan delinquencies, rising interest rates and lower used-car prices are having an impact on new car sales. Lagging sales of sedans persist as lower gas prices and rising employment continue to boost sales of SUVs.
Auto parts makers supplying the U.S. OEM market will want to use caution in their production and inventory strategies as a slowdown in light-vehicle sales continues.
For more on the larger challenges confronting in the auto industry, see the May 2017 issue of The Real Economy.
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The automotive industry has enjoyed unprecedented growth in recent years. Industry executives are aware of factors that could hobble growth.