The economic indicators of recession are starting to trickle in. We are seeing ballooning inventories in multiple sectors of the economy. When times are good, suppliers increase production to meet the rising demand. But as always, they get a little ahead of themselves.
The auto industry sold 17.3 million vehicles last year. Frankly, some of that consumption was the result of major storm damage from settling insurance claims from late 2017 and from 2018, as opposed to true economic demand for new cars. Demand peaked 3 years ago at 17.55 million cars and trucks. Today, inventories on dealers’ lots total 3.95M vehicles. That’s nearly 11 weeks of inventory. The industry considers 30 days of inventory to be healthy. However, if you consider that the current forecast for 2019 is for less than 17M cars to be sold in the US. If we see a drop in demand, then we’re really sitting on close to three months of inventory. General Motors already announced the closure of 5 plants across North America and Ford is also reporting a 27% drop in operating income for 2018.
Part of the driver for new vehicles last year was a change in tax rules that permit businesses to expense the entire vehicle in the fiscal year compared with the previous requirement to depreciate the capital expense over several years. The stimulus resulting from the rule change is unlikely to repeat in 2019 to the same degree.
Other sectors of the economy are also showing signs of slowdown. As we’ve previously reported, the residential housing sector is seeing inventories increase in several markets. Inventories are up 116% in Seattle Washington, up 131% in San Jose California.
Britain is in a full blown contraction, but that’s driven by the Brexit uncertainty. The cloud of what will happen looks like it will take considerably more time to resolve. Prime Minister May has survived a non-confidence vote and has indicated that she will renegotiate the terms of Brexit with the European union after the original deal was resoundingly defeated in the British parliament. The EU has said they’re not willing to renegotiate. The calls for a second referendum is getting increasingly louder.
Italy reported economic numbers for the 4th quarter. They reported the second full quarter of economic contraction putting them technically into recession territory.
France showed contraction in Q4, and December retail sales in Europe overall had their largest one month drop since 2011.