The Automobile Industry Poses a Serious Threat to the Economy

by Daniel Carter
Since the Great Recession of 2008, the auto industry has been one of the keys in propelling our current economic expansion.  In the current year, there have been 18.1 million vehicles sold, and that is well above 15 million vehicles, which is what Goldman Sachs calls the Normalized Demand. Although auto sales have been soaring above the Normalized Demand for a few years now, things seem to be unraveling fast in the industry, and that could mean trouble for the overall economy.  We have appeared to hit a peak in auto sales in November of 2015, and downtrending auto sales usually occur during times of recession.

To deal with the slowing demand for automobiles, GM recently announced that it would layoff 1,300 workers at its plant in Detroit. They also announced that the would be temporarily halting production at 5 manufacturing plants around the country to dissipate the highest inventory levels they have had in 8 years.  The massive build-up in inventory is a sign that they are selling a lot less cars than they anticipated.  The fact that they haven’t had this much inventory since the Great Recession is a warning sign that the industry is signaling another recession.
Another sign that the industry is in trouble is plummeting auto loans.  For several years, interest rates in the US and around the world have been near record lows.  This has meant easy credit availability for things like home loans, personal loans and automobile loans.  Interest rates are coming out of a 35-year downtrend, which means people will be less likely to afford the same cars that they could afford even at the beginning of 2016.  To read more about the much higher interest rates that are coming, you can check out an article I wrote here.  You can see how drastic the change in auto lending has been in the chart below.

The automobile industry’s success is heavily tied to the overall economy’s success and vice versa.  In the 60’s and 70’s troubles in the auto industry were a much clearer sign of an economic downturn because of how massive they were.  Although they do not make up as large of a portion of our economy as they once did, the auto industry is still a good indicator of economic health.  The recent slowdown in the auto industry, along with many other factors, is signaling a recession soon.  Be prepared and stay tuned for more on the coming economic downturn.