Automotive Industry Growth is Unpredictable

The industry has exceeded the expectations of many experts from as recently as the end of 2017.

Of the many economic factors that have an impact on the automotive industry, strong employment levels and wage gains are likely two significant factors behind the auto industry’s performance in 2018. The industry has exceeded the expectations of many experts from as recently as the end of 2017. Working counter to these factors is an eroding financial picture in which banks are less willing to provide credit. Additionally, vehicle-loan default rates are closer to their peak during the great recession than their long-run levels prior to 2008. The recent net effect of these influences has been largely to offset one another, if not slightly to the benefit of the industry. In the first half of 2018, monthly light truck and SUV sales remained near the one-million unit market while car sales during the second quarter were flat, halting an otherwise downward trend.

While the exact reasons for any given firm’s future may be unique to that firm’s circumstances, the collective results of these forecasts may shed light on the general direction of the industry in the coming months and years. Reviewing Wall Street’s financial projections for 23 automotive firms with cumulative first quarter revenues of $223 billion reveals a somber outlook for the industry between the second quarter of 2018 and mid-2020. Overall earnings and revenues by the end of 2018 are projected to be modestly better than a year ago. However, the cumulative projections for 2019 indicate a flat to slight downward trend in revenues and contracting earnings. 

Although the Gardner Business Index data are not projected, examining only the automotive data seems to support Wall Street’s notions that the industry may need to prepare for a more challenging environment in 2019. In the five quarters ending with the first quarter of 2018, Gardner’s data indicated new orders and production as the fastest growing economic industry drivers. However, by the second quarter of 2018, readings for new orders and production had moved lower, giving way to higher readings for supplier deliveries and employment. Generally, these are considered lagging indicators, as both are slower to respond to economic growth. While this transition of drivers is no guarantee of an immediate economic slowdown, it is consistent with an industry coming off expansionary times.

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