Automotive Industry Beats Expectations

Of the many economic factors that have an impact on the automotive industry, strong employment levels and wage gains are likely the two most significant factors behind that industry’s performance in 2018. The industry has exceeded the expectations of many experts from as recently as the end of 2017, despite an eroding financial picture in which banks are less willing to provide credit. Additionally, vehicle-loan default rates are closer to their peak during the Great Recession than to their long-run levels prior to 2008. The recent net effect of these influences has been largely to offset one another, if not slightly benefit the industry. In the first half of 2018, monthly light truck and SUV sales remained near the one-million unit market while car sales during the second quarter were flat, halting an otherwise downward trend.

A review of Wall Street’s financial projections for 23 automotive firms with cumulative first-quarter revenues of $223 billion reveals a somber outlook for the industry between the second quarter of 2018 and mid-2020. Overall earnings and revenues by the end of 2018 are projected to be modestly better than a year ago. However, the cumulative projections for 2019 indicate a flat to slight downward trend in revenues and contracting earnings.

The industry has exceeded the expectations of many experts from as recently as the end of 2017, despite an eroding financial picture in which banks are less willing to provide credit.

Although the Gardner Business Index data are not projected, examining only the automotive data seems to support Wall Street’s notions that the industry may need to prepare for a more challenging environment in 2019. In the five quarters ending with the first quarter of 2018, Gardner’s data showed new orders and production as the fastest growing industry drivers.

However, by the second quarter of 2018, readings for new orders and production had moved lower, giving way to higher readings for supplier deliveries and employment. Generally, these are considered lagging indicators, as both are slower to respond to economic growth. While this transition of drivers is no guarantee of an immediate economic slowdown, it is consistent with an industry coming off expansionary times.

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ABOUT THE AUTHOR: Michael Guckes is the chief economist for Gardner Business Intelligence, a division of Gardner Business Media (Cincinnati, OH US). He has performed economic analysis, modeling and forecasting work for nearly 20 years among a wide range of industries. Michael received his BA in political science and economics from Kenyon College and his MBA from The Ohio State University. mguckes@gardnerweb.com