Automotive Production to Rebound in 2015

Last September, I wrote that motor-vehicle and parts (MV&P) production would slow for the remainder of the year. That happened. The market ended 2014 growing at virtually its slowest rate in five years. But based on recent data from the automotive industry, production should start growing faster this year.

Interest rates remain low; the change from one year ago in the real 10-year Treasury bond rate is moving farther and farther into negative territory. So, as the cost of debt continues to get cheaper, durable goods like cars become more affordable. Moreover, real disposable income is growing at a much faster rate than a year ago. In fact, the annual change in disposable income is growing at its fastest rate in nearly two years. And the growth in income is poised to accelerate more.

This combination is spurring increased consumer spending on motor vehicles and parts. On an absolute basis, MV&P spending is at its highest level in a decade. On an annual rate-of-change basis, consumer spending on cars and parts is growing faster than it has at any time since late 2002.

The growth rate in MV&P tends to track the growth rate in consumer spending (see chart). However, spending and production got out of whack after the financial collapse in late 2008. Production dropped farther than it should have in 2009, and rebounded more than it should have in 2010 and 2011. So even though car and part spending grew at significant rates in 2012 and 2013, the industry needed to work off the over-production from 2011 and 2012. 

With spending and production in better balance now, the two should start tracking each other closely again.

So with the rapidly accelerating growth in spending, industrial MV&P production should see accelerating growth in 2015, which should increase capital spending among processors serving this market. Gardner’s Automotive Business Index showed that the auto industry expanded rapidly from November to January after a relatively slow period from August to October. The overall automotive index is now growing at its second-fastest rate since April 2012. New orders have increased dramatically recently and have been on an upward trend for nine months or so.

Production has grown as well, but at a much slower rate than new orders. So backlogs at auto-parts manufacturers have skyrocketed. The backlog index in January hit its highest level in the history of our survey. Changes in backlogs tend to lead changes in capacity utilization by about seven months. Therefore, capacity utilization at car manufacturers should see accelerating growth in the next quarter or two. This suggests increased capital spending at these facilities.