By Helmo Preuss, Forecaster Ecosa.
The American consumer is the bedrock of the US economy accounting for 69.1% of total GDP in 2016, while exports only managed a 12.6% share. That means when the Bureau of Economic Analysis (BEA) reports a decline in real personal consumption expenditure (PCE) then investors and economists should sit up and take notice and not get distracted by the reams of “fake news”.
On March 1 2017, the BEA reported a 0.3% monthly decline in real PCE in January 2017, the first monthly decline in this measure since January 2014. The true test as to whether this is the proverbial “canary in the mine” regarding a possible US recession will come with the February data, as the last time the US reported consecutive monthly declines in real PCE was in the recession year of 2009.
The auguries are however not good. In the first case, real PCE is to a certain extent dependent on real disposable income. In February, the Bureau of Labour Statistics (BLS) reported that real average weekly earnings managed only a marginal 0.1% monthly increase in February after a 0.4% monthly drop in January. On a year ago basis real average weekly earnings declined by 0.3% in February after a 0.5% drop in January.
A consumer can temporarily borrow from the banks to cover an unexpected shortfall in income, as tax rebates were delayed in February, but the US consumer credit to personal expenditure ratio is already at a record high, so consumers are unlikely to have been able to borrow much in February.
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The poor consumer demand is already reflected in the US light vehicle sales which fell for the second consecutive month in February.
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In addition, the US industrial production data for February showed a 5.7% monthly plunge in utility production. As utility demand matches supply (think electricity) this means that February real PCE should also reflect the warm February.
The US Federal Reserve has also warned that asset managers may face a problem during a crisis as they have promised investors that they can redeem their assets in a single day, yet have invested in assets that can take longer to redeem, so there is a mismatch between promise and reality. The 200 point drop in the Dow Jones index on March 21 2017 highlights the danger of a rapid fall in US equity markets, which on most valuation measures are vastly over-valued.
The number of Americans who have stopped paying their car loans appears to be increasing, while repossessions are rising causing used vehicle prices to decline by more than 7% y/y and resulting in US vehicle manufacturers increasing their incentives. Losses on subprime auto loans have spiked to 9.1% in January 2017 from 7.9% in January 2016, while recoveries on subprime auto loans fell to just 34.8%, the worst performance in over seven years.
General Motors (GM) has increased its incentives up to $1,350 per vehicle, which is far higher than its peers, where incentives are in the $200 to $300 range. The exceptional incentives are aimed at reducing its inventories, which were 91 days of sales at the end of February; particularly in small passenger cars at 122 days; and mid-sized passenger cars at 148 days. The “normal” industry inventory to sales ratio is less than 60 days.
The high US light vehicle inventories means that US car manufacturers will have to cut back on output in coming weeks, making a US recession that much more likely as the auto industry cutbacks ripple through the rest of the economy.