Welcome to The Observatory. The Observatory is how we at Prometheus monitor the evolution of the economy and financial markets in real-time. The insights provided here are slivers of our research process that are integrated algorithmically into our systems to create rules-based portfolios.
Our primary takeaways are as follows:
- In July, real motor vehicle sales increased by 0.76%, which was primarily driven by an increase in production. This was a support to nominal activity, as our estimates showed nominal motor vehicle sales growth of 7.62% over the last year.
- Motor vehicle production and capacity utilization have typically been good indicators of cyclical conditions. Currently, motor vehicle production relative to capacity is inconsistent with a recession.
- Looking forward, continued strength in the motor vehicle complex will likely be a support to nominal activity and inflationary pressures. In the context of markets, this will continue to favor stocks relative to bonds.
In July, real motor vehicle sales increased by 0.76%. Sales growth can come from a combination of production, imports, or inventory drawdowns. This month, sales were driven by a 5.99% change in production and -5.23% change in exports and inventories, respectively. This print contributed to a sequential deceleration in the six-month trend. Below, we show the sequential evolution of the data, along with the composition driving these monthly changes:
Motor vehicle spending is directly reflected in GDP in the form of consumer motor vehicle purchases and business investment in motor vehicles. To better understand this spending, we look at the composition of total motor vehicle unit purchases, by type of motor vehicle. As we can see below, motor vehicle purchases have increased by 19.23% over the last year. This move in purchases was driven by Autos (3.1%), Light Trucks (15.5%), & Heavy Trucks (0.63%):
While real sales increased in July, total motor vehicle production increased. Over the last year, motor vehicle production was driven by Autos (3.1%), Light Trucks (15.5%), & Heavy Trucks (0.63%), rising by 13.09%:
Motor vehicle production and capacity utilization have typically been good indicators of cyclical conditions. Currently, motor vehicle production relative to capacity is inconsistent with a recession. According to our estimates, readings between 43% and 65% are consistent with recessionary activity:
To better understand how this motor vehicle production has created spending and income, we now turn to nominal sales for automobiles across manufacturers, wholesalers, and retailers. Over the last year, our estimates of nominal sales showed nominal motor vehicle sales growth of 7.62%. We show the contributions coming from manufacturers (1.7%), wholesalers (1.77%), and retailers (4.16%) below:
Now that we have examined the impact on business sales, we also examine how this is reflected in wages. Over the last year, our estimates of nominal wages showed nominal employee income growth of 5.55%. We show the contributions coming from manufacturers (4.11%), wholesalers (1.07%), and retailers (0.38%) below:
Putting this data in the context of markets, transportation equities have moved consistent with the most recent six-month trend in motor-vehicle sales, with transportation equities falling relative to broad equity markets. Below, we show the relative performance of transportation equities versus broader markets over the last year:
To conclude, the current state of motor vehicle production and sales is inconsistent with that of a recession. Moreover, continued strength in the motor vehicle complex will likely be a headwind for disinflation and support to nominal activity. Currently, the package of stronger-than-expected nominal activity plus disinflation has continued to support stocks. We visualize this below using our equity factor attributions:
The pace of growth contributions to equity performance has indeed begun to slow and show a more mixed trend. Nonetheless, markets continue to price resilience in nominal activity, benefitting stocks relative to bonds. Until next time.