Where is the economy headed?
Photo: Thomas Nilsson. Source: Pixabay
Market-watchers are always looking for insight into what’s happening in the economy. It’s important to separate the signal from the noise. We can easily get distracted by politics, headline news, and our personal perspective. If you have a friend who can’t seem to find a job, it’s easy to conclude that the economy isn’t creating many jobs – even though your sample size makes the observation statistically irrelevant.
But one economic factor that has a lot of statistical relevance is auto sales. Consumer purchases drive the economy, and consumers don’t go out and buy a new car (or light truck) if they don’t feel very good about their personal finances. Yes, we also respond to short-run incentives, like “cash-for-clunkers” or special financing terms. But gradually rising auto sales are a good indicator of the long-run health of the consumer. It’s hard for the economy to turn down when auto sales are rising.
And what are sales doing now? Automakers just achieved a record seventh straight annual sales gain – one of the longest strings of annual increases ever.
Total US Auto Sales. Source: St. Louis Fed
In the past, a quick recovery in sales was followed by gradual weakening. But coming off of the deep decline in sales during the 2008-9 recession, consumers have increased how many cars they buy each year for the past seven years. December’s strong sales put 2016 over the top – despite a modest fall early in the year, a late-year push lifted 2016 sales to 17.6 million units, 0.4% above 2015’s level.
At this point, it’s probably a mistake to assume auto sales can continue their uninterrupted rise. While strong consumer confidence should keep sales at these high levels, all kinds of other factors can get in the way. There are a lot more used cars in the market now – and their prices are falling. In December, manufacturers offered a lot of incentives, something they say they won’t do again. And there are only so many car buyers out there.
Still, it’s encouraging to see all the new car sales. Driving a new car off the lot makes people happy. And happy consumers often lead to a happy economy.
Douglas R. Tengdin, CFA
Chief Investment Officer
Charter Trust Company