The numbers look good now, but moving forward there are reasons to be cautious about the auto industry.

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The annual rate of sales of cars and light trucks improved in 2013 from about 14.9 million units in January to almost 15.7 million units in December. In other words, the actual number of vehicles sold in December would translate into 15.7 million for a whole year at the same rate. That’s a dramatic turnaround from the annual rate of 9.5 million units in the summer of 2009.

Some expect the auto industry to remain strong because of the aging U.S. fleet, which is well beyond the typical replacement cycle. Also, new fuel standards mean that many new vehicles and drive trains will come on line over the next five years. Both of these help support motor-vehicle and parts production.

However, there are a couple of reasons to be cautious about the automotive industry. While sales have been strong, dealer inventories have been building. Perhaps more importantly, the industry has plunged back into sub-prime lending to generate new sales. Car loans are now being extended to as long as eight years. This is a sign that the consumer is only able to afford the new car by getting the monthly payment as low as possible. Going to these extremes to sell cars should make OEMs and their suppliers cautious about the future.

Unless inflation begins to pick up, real interest rates will not  support more consumer debt for much longer. Also, the rate of growth in real disposable income has been slowing since October 2011. Because of the trends in interest rates and income, real motor-vehicle and parts spending has been growing more slowly since May 2013. As a result of slower growth in spending, production of motor vehicles and parts has been growing at a slower rate since November 2012. Even though the rate of growth has been slowing for more than a year, it is still at a historically high level.

Our automotive business index shows that the industry has grown for seven straight months. The industry has grown at a slightly faster rate in each of the last two months. New orders have grown for the last five months. Over the last four months, the rate of growth in new orders has been quite strong. Production has expanded in the last five months as well. It has generally been on an uptrend since the end of 2012. Since June 2012, backlogs generally were improving, which indicated increased capacity utilization in motor-vehicle and parts manufacturing.

However, the backlog index looks to have broken its uptrend in January. Employment contracted in two of the last three months. Exports increased in five of the last six months. Future business expectations have improved significantly since April 2013.

ABOUT THE AUTHOR

Steven Kline Jr. is part of the fourth-generation ownership team of Cincinnati-based Gardner Business Media, which is the publisher of Plastics Technology. He is currently the company’s director of market intelligence. Contact: (513) 527-8800; email: skline2@gardnerweb.com; blog: gardnerweb.com/economics/blog.