Why Slumping Auto Sales May Not Say What You Think They Say

Via FFWiley.com,

July auto sales (released today and charted below) remained weak and should trigger a few recession forecasts. In fact, over the past few months we’ve read about half a dozen commentaries linking the recent plunge in auto sales to an imminent recession. And we understand the reasoning, but we’ve yet to buy into it.

We agree that car sellers face a degree of demand saturation while potential buyers suffer from credit saturation, or at least that’s what the data seem to show. We also agree that the saturation twins tend to be late-cycle indicators. But we’d like to add another possible explanation for slowing auto sales, one that yields a different conclusion about recession risks.

Our view is this: Maybe the sales slump isn’t so much an independent force that’s driving the business cycle but merely a substitution for other types of spending.

Think, for example, health care. Classifying health care as a “big ticket” item in the consumer’s basket (seems reasonable), it surely falls in the big three, alongside homes and autos. There’s only so much room in the average middle-class budget for those three items. Changes in outlays for one of the items can easily squeeze the other two. And we think we can demonstrate the sumo battle between health care and auto sales with two charts.

The first chart shows three separate instances of soaring health spending. (Note that the 2016 data for this spending category won’t be available until midway through the Bureau of Economic Analysis’ Annual Update; it’s due on August 11. Therefore, we estimated 2016 and projected 2017 using the narrower “health care spending” category, which grew over the past six quarters at a pace only exceeded in 2015. Our 2016 estimate could be too low, thanks to the insurance premium “shock,” but we won’t find out until next Friday, and we’ll add an addendum to this post at that time.)

The chart shows that the most recent jump in health spending growth, beginning in 2014, was even bigger than earlier episodes. Of course, 2014 was also the first year of Obamacare. In our view, it stands to reason that Obamacare’s cost effects should eventually prey on other types of spending. Also, the most vulnerable types are those that require large commitments that are difficult to shed, such as lease payments on new cars.

While that may sound speculative, history seems to support our theory. Our second chart (below) shows that the recent decline in auto sales, if it continues, would be the third consecutive instance of health and autos occupying opposite ends of the same seesaw.

And how do our charts relate to recession risks?

Well, the math suggests that any hurt felt by those in the auto industry is mitigated—at least on a whole economy basis—by good times being had by those working in health care, pharmaceuticals, and insurance. In fact, if we’re right about that substitution, it may even be a net positive for GDP. Consider that each dollar of auto spending scatters among producers of autos and auto components all over the world, whereas a dollar of medical spending tends to be felt more strongly in the United States.

So, if you haven’t yet traded your old RAV4 for a new 4Runner because you’re shell-shocked by medical premium increases, you may have recycled more of your income back into the domestic economy than you otherwise would have. And the additional income you’re applying to medical costs shows up in GDP, per the charts above. Unfortunately, it also eats into other types of spending. But that fact alone shouldn’t cause you to change your business cycle forecast from expansion to recession. When it comes to recessions, you might put more weight on indicators such as lending standards, which, if they deteriorate, would tip the scales against many industries at once. (Stay tuned—the Fed’s lending standards survey for the second quarter should be released by next week at the latest.)

And because we can’t close this article without some snark…

To be clear, we’re offering only a short-term business-cycle view, not an endorsement of our current health system. We’re not applauding large increases in premiums, co-pays, and deductibles. In fact, we’d be more likely to join the bleacher bums raining “boos” on the health spending boom’s unfortunate side effects. Make sure to include those side effects in the “unintended consequences” column of your Obamacare scorecard.

Better yet, considering that the insurance and “doc” lobbies crafted much of the legislation (see, for example, this book), the growing consumption share accruing to insurers and medical providers probably wasn’t unintentional. It might be more accurate to switch it to the “intended consequences” column. Either way, it’s one of a number of challenges that demand our attention as the nation continues to debate the curiously named Affordable Care Act.


Utopia Planitia GUS100CORRINA Wed, 08/02/2017 - 16:02 Permalink

One of the problems is calling it the "US Healthcare System".  That completely clouds what is really going on.  It is really an evil pyramid with the people doing the HealthCare at the bottom.  Tons of worthless crap (where all the money is going) on the upper levels.  People voted for Wash DC to "run their healthcare".  That can be fixed, but the sheeple have to wake up.  Your relationship should be between you and your doctor, nurse, PA, chiropractor, etc. etc.  Get the insurance company, paper pushers, electronic documentation systems, paperwork procedure dictators, and politicians OUT OF THE MIDDLE!  The problem is not what your doctor is charging.  The problem is that a huge percentage of the charges are going to worthless overhead leeches that have come into existence through LEGISLATION.  It exists only to serve itself!  Just like everything in WA DC. (Oh, but they say they care for the children!!!  Charlie Gard is coming to the USA - fast.)If you are somebody who wants your "HealthCare" run by a bunch of ignorant, self-serving assholes in WA DC (i.e., Bernie and Pocahontas, etc) then go set up a private system and put them in control.  I say good luck to you.  But LEAVE THE REST OF US ALONE!!! We do NOT want WA DC running our healthcare!I have to pay 2X for everything because now you have to pay for Govt. Healthcare whether you want to or not. Then you have to pay again to get the healthcare you want (i.e., the healthcare that actually works) by paying under the table.

In reply to by GUS100CORRINA

techpriest Arnold Wed, 08/02/2017 - 14:09 Permalink

Thinking back to when my wife turned 21, the "Affordable" Care Act jumped private insurance from $70 a month to $350 a month. And I was a grad student then, making $1700 a month. So yes, we were looking at student loans or her staying on her dad's insurance. By the time she was 26 I had a real job, but still, I look at what the company is paying for our insurance, and my goodness what a scam!

Needless to say, Obama is doing the Millenials no favors, and it boggles the mind why they still lapped it up like antifreeze at a petting zoo.

In reply to by Arnold

post turtle saver (not verified) techpriest Wed, 08/02/2017 - 14:52 Permalink

"Needless to say, Obama is doing the Millenials no favors, and it boggles the mind why they still lapped it up like antifreeze at a petting zoo."that's easy, it's because millenials are a bunch of fucking commies, that's why... their hippy dippy boomer parents have taught them well...

In reply to by techpriest

Snaffew Wed, 08/02/2017 - 14:03 Permalink

ok...so health care costs go up, housing prices go up, rent prices go up and food prices go up.  Actually, these prices aren't just going up...they have been surging--8 percent month over month.  For a country that runs on 71 percent consumer discretionary purchases, don't you think this may have an impact on the economy?

FoggyWorld Wed, 08/02/2017 - 14:14 Permalink

Cars for most people at this point just represent transportation.  They no longer are the signature pieces they once were.And who wants to invest that sort of money in a new car - or even a used one - that depreciates as you drive it off the lot?  Truly I who always have had sports cars, have resigned from that market and have a small car that gets me to where I need to go.   Just no longer want to put a whole chunk of money into something so fleeting and leaves me with less to spend on things that are a bit more important.

whatswhat1@yahoo.com Wed, 08/02/2017 - 14:21 Permalink

I don't see anything in the article regarding .gov Medicaid spending.  I bring up the issue because of multi-millionaire friends who qualified for Medicaid based on their tax deductions and returns.  Is Medicaid cost included in the graph?  I believe so.  And, if the Medicaid cost was backed out, the results would not fit the theory being pushed in the article. 

Icewater Enema Wed, 08/02/2017 - 14:22 Permalink

Yeah, marketers like to talk about substitutes and cannibalization. " I bought a six pack of diet Coke instead of regular Coke." But what they fail to realize is that EVERYTHING is a substitute for EVERYTHING when your income is effectively constant. If you spend $1000 more per month on health insurance, you are NOT spending it on other things, like a car payment. Take heart, though, it's all good, like FFWiley says. It's all about where the money is channeled. So your insurance payments are being funneled to a doctor or hospital manager's salary. So you are supporting the yacht industry and all its suppliers when Dr. X can afford to buy a new sailboat, and that's a positive for GDP!

Md4 Wed, 08/02/2017 - 14:23 Permalink

Lousy wages, few good-paying jobs, obscene housing costs, still-rising consumer debt levels (without much deleveraging over the last few years)...

...THEN the BloCare debacle on top of that (if you're working and are not on Medicaid and/or disability).

Nothing works unless WE do.

And get paid a meaningful wage to do so.

medium giraffe Wed, 08/02/2017 - 14:32 Permalink

credit saturation, but also wages in decline, buying power eroded, no interest on savings, stealth inflation, health care costs, taxes.perhaps they should make moar vehicles.  that'll fix it.  ffs.....

In.Sip.ient Wed, 08/02/2017 - 14:35 Permalink

While it is a very good argument, it has one problem.The beneficiary is not the consumer and thereforeoverall economic activity declines. Just because the DOW and banks and insurance companiesare doing fine does not prevent the overall economy from crashing. In fact, the big problem with CB conduct is that it guarantees a"select few" prosper and the many do not.  If the "many""do not" then you still have a depression.. Oh, and some pip squeek in NK can credibly threaten you,because your economy ( you know, what you need toPAY ... in real terms not airy fairy talk ... for wars ) is dead. 

gmak Wed, 08/02/2017 - 14:46 Permalink

More boomers are retiring - lower income, than are entering the work force - not to mention at a much lower salary than the retiring boomers. Are aggregate individual wages rising? If so, are they rising faster than overall costs?  If NO, then you have, by mathematical definition, a contraction in the economy. It really doesn't matter (as the author implies) what sector contracts or grows (except to those money managers who still invest based on analysis). It only matters whether the aggreagate income grows faster than the aggreagate cost.

DavidFL Wed, 08/02/2017 - 14:47 Permalink

/* Style Definitions */
{mso-style-name:"Table Normal";
mso-padding-alt:0in 5.4pt 0in 5.4pt;
Who writes these articles?  We should let auto manufacturing die while we emphasize health care spending. Get this – because more of the health care dollars stay in the US! Lets just raise the price of health care by (another) 50% and the resulting rise in GDP will fix our economy! Sounds good to me.  

post turtle saver (not verified) DavidFL Wed, 08/02/2017 - 14:56 Permalink

we may as well raise minimum wage to $35 an hour while we're at it... I mean, if $15 an hour is good then $35 should be that much better, right?heaven knows the unions will appreciate it... they can talk to their proctologists while they're in the sales lobby waiting to pick up their new rides... win-win... 

In reply to by DavidFL

fbazzrea Wed, 08/02/2017 - 15:27 Permalink

play with your charts and theories all you want.everyone that could fog a mirror has bought. many of those credit-challenged buyers struggle to own them. couple even sharper depreciations due to the massive glut of leasing returns with extended terms at criminal interest rates and there's only one outcome.and it ain't pretty. puts on the majors should be an extremely rewarding wager.so if you're trolling for fishbait on the other side of your shorts here at ZH... go fish

Rick Cerone Wed, 08/02/2017 - 15:27 Permalink

The manufacturer and the dealership are not the same entity.Manufacturer record a sale when the car rols off the plant floor.Dealership records a sale when the car rolls off the lot.Keep that in mind.

CRM114 Wed, 08/02/2017 - 15:52 Permalink

New vehicles are supposed to have increased reliability, efficiency, more useful features, and consequently better resale also.For at least 3 years they have had none of those. Reliability (in terms of cost per mile of failures, not to mention time spent in the shop for repairs) has been decreasing for 8 years at least. The prices are ridiculous and the added features are not what most people want.So, perhaps you should look at what consumers actually want - it isn't what the manufacturers are producing. Pretty simple really.

Umh Wed, 08/02/2017 - 16:03 Permalink

The only good that I have seen as a result of Obamacare is that working class people trust the government less than they did before.

Iconoclast421 Wed, 08/02/2017 - 16:24 Permalink

If money goes away from actual real things and gets sucked into a medical racket then it is essentially disappearing. Sure, there are more healthcare "administrators" being paid in place of auto manufacturers. But do they actually produce anything? No. Then money is going to lose velocity because of it.

moonmac Wed, 08/02/2017 - 16:59 Permalink

Recession is being avoided because poor workers are being squeezed dry by rising cost of living with decreasing real wages which is technically a Great Depression.

Twee Surgeon Wed, 08/02/2017 - 18:36 Permalink

Other types of spending. That is Hilarious. People, the average dude and girl that gets up to go to work in the morning/evening is pretty much tapped out as far as I can see. Just because THEY Pumped Trillions of dollars into the so called Economy, it does not mean that any of that trickled down to Joe Blow and his vast extended family, does it ? There is no New Money in the Economy, there are Digital Ledger things, in files on hard drives, all around the world at various Bank Data facilities.That stuff is not going anywhere as the Banks got it for free and they all want to be the last Bank standing. They should Tax that shit. It's nothing to Banks but a Digital File with a Code Transaction Number that they can utilize if the shit hits the fan.It's all Bullshit. there is no Money there is only Numbers. People flipping and Flopping Imaginary numbers on Imaginary Markets. it is the Definition of Insanity.It's a group of old ladies who meet at the Library on Thursday mornings to exchange Grocery coupons and you're not in the club. 0110001100100011000110100.That is Money in the Bank. Digital fantasy, Nothing.

esum Wed, 08/02/2017 - 18:44 Permalink

Why Slumping Auto Sales May Not Say What You Think They Sayyes of course..... i did not buy a 2018 AUDI RS5 and OPTED INSTEAD TO BUY A $319 INFLATABLE HOTTUB... for my health....FAR AS GOVT HEALTHCARE.... the government cant run a whorehouse (Mustang Ranch which they seized for tax evasion and then it went bankrupt..... wtf????)and the GOVT cant run healthcare either.... i.e. OBAMACARE.....IF THE GOVT TOUCHES ANYTHING.....IT TURNS TO SHIT   

Last of the Mi… Wed, 08/02/2017 - 20:08 Permalink

We're witnessing the government healthcare racket vacuum up all available funds for it's own maintenance. The leviathan they've created consumes all disposable income and will never allow any sort of economic recovery. Short of repeal, open markets, and insurance sold across state lines as a competitive commodity, the truth is the economy is done. Thank you so much, Obama, Paul Ryan, Nancy Pelosi, Mary Landreau, Chuck Schumer, the asshole with the turkey gobbler thing going on, and a special thanks to John McCain and Lindsey Graham. Their special form of deceit by scamming the entire US population by claiming they were for Obamacare repeal when in fact they were for the exact opposite just cannot be overstated.