(Bloomberg View) -- The rubber is about to meet the road for the U.S. economy. An unlikely candidate, the auto sector, has emerged as the key piece of economic data. That means that June 1, the day May car sales are released, rather than June 2, when the May jobs report will be released, should be the most important date on investors’ radar screens.
Two standout areas of strength in the current recovery have been energy and autos, industries that have always afforded non-college-degree holders strong career paths. The oil slump eviscerated jobs in the first sector, leading many to be optimistic about a rebound that followed oil prices back up. Although many wells have been flipped back into production, the industry became vastly more efficient during the down years, and fewer jobs have returned as a result.
As for autos, its renaissance has been a major driver of economic growth in recent years; about 5 percent of U.S. jobs are tied to the sector. Annual sales have risen for seven consecutive years, and 2016 and 2017 set back-to-back records.
That makes the last four-month decline in sales that much more daunting for those reading the economic tea leaves. If there’s one detail that distinguishes March and April from the recent trend, it’s the breakdown in truck sales. The deep dive in gasoline prices has emboldened millions to purchase the gas guzzlers. This highly-profitable source of support finally giving way could well mark "peak autos."
On a more fundamental level, a protracted decline in car sales would be the final stroke for a faltering recovery that is already weighed down by the unrelenting carnage in the retail sector. Tellingly, it is the intersection of retail employment and autos that could offer the best clues of what’s to come.
Unlike other brick-and-mortar retailers, auto dealerships have been aggressively expanding their employee base in recent years. Since 2011, dealers have grown headcount by 4 percent. This year, though, that growth rate has been halved. With inventories at record levels and incentive spending up 13 percent over last year, odds are rising that manufacturers will be forced to cut back on production.
At the same time, the ability to sell car loans into the asset-backed securities market has been pinched. According to Standard & Poor’s, the auto securitization rate, that is ABS outstanding/loans outstanding, continued to decline in the first three months of the year, falling by 40 basis points. Meanwhile, traditional banks also reined in lending for autos in the first quarter in the face of mounting losses against souring loans made in recent years.
Could it be that nascent signs that the so-called "soft" data coming off their highs have picked up a change in the winds? With the exception of the ISM non-manufacturing index, you can all but line them up: The National Association of Homebuilders, ISM, University of Michigan Sentiment, Conference Board Consumer Confidence and even the National Federation of Independent Business. Two separate small business surveys released by Wells Fargo and Bank of America corroborate the NFIB’s coming off its boil. All have come off their post-election highs.
But it was the entrails that were the most revealing. Within the Conference Board data there was a 3.2 point drop among those expecting higher incomes, which erased March’s gains. This move was corroborated by the lesser known Gallup Economic Index, which unexpectedly fell sharply in April. Within the ECI, 46 percent reported the economy was “getting better” while 47 percent said it was “getting worse,” which pushed the economic outlook to negative-one from a plus-four in March.
A convergence of the "soft" and "hard" data has been widely predicted for months. It is a rare occurrence that consumers have exuded such enthusiasm for future economic prospects and yet spent so little. Ominously, the one quarter that parallels the most closely with today’s is the first three months of 1987, when stocks were flying high, as they are now.
Of course, back then there was no VIX index, no "fear gauge" that measured investors’ alarm or complacency depending on whether the reading was high or low. In Monday’s trading, the VIX broke below 10 to close at 9.77, the lowest level in more than a decade. There are only three other days the index has closed at lower levels, all of them in December 1993.
We are witnessing some of the calmest markets in history. Or, we are witnessing an accident waiting to happen.
Not surprisingly, major carmaker economists have voiced confidence that labor market strength points to growing, not shrinking incomes, and that the recent weakness is as "transitory" as Federal Reserve Chair Janet Yellen says. Presumably, they’ve been schooled in traditional economics and know labor market indicators lag behind all others. It follows that the best economists in the world at the Fed will not chase the jobs data and in doing so, overreach on their tightening campaign, otherwise known as committing a policy error.
To err when the Fed’s own data are all but advertising a slowdown would be bold. As Bank of America ML’s Hans Mikkelson pointed out after the release of the Fed’s March’s Senior Loan Officer Survey, “Today's fresh Sr. Loan Officer Survey showed continued very negative growth in consumer loan demand as well as deterioration into negative territory for C&I (commercial and industrial) lending. It thus appears that the key post-election story continues -- i.e. while optimism is high everybody is in wait-and-see mode pending details on tax reform from the new administration.
"The longer this lasts the greater the risk of more weakness in hard data. It appears a great contradiction to these circumstances that the VIX closed today at 9.77 -- the lowest since December 1993. Weak loan demand tends to be associated with high volatility, not low.”
What can be gleaned from the emerging and existing trends? It’s far too easy to see where job destruction will come from in the coming months and years, and markets are wholly disregarding this predictable event. It’s much more challenging to get a clear glimpse of the mirror image, that of job creation. If there was ever a need for a tiebreaker, it’s now. Look to the auto sector to be the deciding factor.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Danielle DiMartino Booth, a former adviser to the president of the Dallas Fed, is the author of "Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America," and founder of Money Strong LLC.
To contact the author of this story: Danielle DiMartino Booth at Danielle@dimartinobooth.com.
To contact the editor responsible for this story: Max Berley at mberley@bloomberg.net.
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