After Houses and Cars, What’s Left?

As I wrote back on March 26, there is no better indicator of the health of the US economy than housing. Not that it should be so important. But America is a consumer society and housing is the biggest ticket item there is for most people.

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On March 21, we got the existing home sales data for February. Demand for housing shocked to the downside. Existing home sales fell 7.1% with all segments of the market showing weakness. Median prices fell 1.4%. Econoday noted that the numbers were “much lower than expected.”

Well, there is one other asset just as important to the US economy as houses…cars. And cars are now looking sick. Something is not right in auto-land. Inventory is rising rapidly and the all-important inventory-to-sales ratio is verging on panic territory. Obviously, the manufacturers have been stuffing the wholesale channel to get their sales up. Now, they are going to pay the price. If you know a car dealer personally, consider rounding up his guns before he does something stupid.

Inventories at the wholesale level are the worst we have seen since the Great Recession. Here’s the 25 year seasonally-adjusted chart of wholesale inventories for the month of February from Jeffrey Snider of Alhambra Partners:

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The inventory problem is the direct result of a serious setback in overall motor vehicle sales. Surplus inventory is not going to be solved by increased sales which are actually tanking (see chart below).

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What’s even more concerning is that vehicles have been about the only bright spot in an otherwise depressed US manufacturing sector. Peaking in October and November at a seasonally adjusted annual rate of 18.6 million units, sales have dropped by an astounding 9% to just 16.9 million in March, with sales falling 1 million units in March alone. As these numbers filter into the data on industrial production and durable goods, markets are going to be shocked.

Vehicle and housing sales are the key factors to watch now. They are clearly signalling a US recession dead ahead. When the market figures that out, you will not want to be holding US equities.