In recent months the US auto industry has been bombarded with a barrage of bad news: starting with Ford’s disastrous August sales when the company admitted “sales have reached a plateau“, continuing to the surge in delinquent subprime auto borrowers hitting nearly a 7 year high as the marginal creditworthy car buyers disappears, then noting the record $4,000 in industry-wide new car incentives in September as preventing a plunge in last month’s auto sales, and recalling last week’s downgrade of the US auto sector by Goldman which said that the US “cycle has peaked“…
…one would think that global auto sale would follow a similar downward trajectory. One would be wrong.
According to data by JPM, global auto sales jumped 3.5%m/m in September on the back of strong gains in July and August. The pace of sales now stands at an all-time high of 78.0 million units per month, annualized. In whole, auto sales jumped 16.2%ar in 3Q (%3m/3m basis). On a %3m change basis, the move is an even more impressive 27% annualized through September.
The first warning light, however, that this number is fake is that as JPM admits, it “contrasts with a more subdued pace of overall consumer goods spending, which is looking to have taken a breather starting in August.
The second warning is what we noted earlier in the week, when we reported that as one Chinese bubble has popped (again), namely the housing one, the country is now steering its consumers into the latest and greatest of Chinese asset bubbles: autos. JPM confirms as much warning that “China’s influence on the recent surge in auto sales is large and this suggests some caution is warranted in taking too large a signal.”
Actually it’s not a warning light: it’s a full bore siren. According to the latest data, of the impressive 4.4mn unit rise in global auto sales since June, China alone contributed for 84% of this global increase, or 3.7mn units.
How did China manage to blow such a major bubble so fast? JPM explains that as the largest auto sales market in the world, China witnessed a spur in auto sales over the past year. However, this is not due to organic demand, and is almost entirely to a tax cut (by half) on small engine cars implemented by the government in September 2015. Since the cut, China’s auto sales have increased by 33%. Think cash for clunkers on trillions of debt-funded steroids.
And just like in the aftermath of the financial crisis when China’s unprecedented debt growth spree kept the world comatose out of cardiac arrest, it is the massive Chinese demand impulse, which will shortly fade, that is pushing the world forward if only for the time being. As JPM admits, excluding China from its global aggregate paints a different picture. Auto sales in this group basically did not grow in 3Q. Much of the weakness came from the EM ex China group, where auto sales fell almost 5%ar in 3Q. DM auto sales also did not impress in 3Q with a modest 2%ar move up. Large declines in 3Q auto sales were seen in Japan, Sweden, Norway, Korea, Brazil, Russia, and Czech Republic, with Emerging markets and oil producers such as Brazil and Russia impacted the most.
Finally, here are JPM’s thoughts on the US:
Zooming in on the US, auto sales have stabilized over this year despite a solid gain last quarter. Year-to-date, auto sales are up only 1.4%. Nevertheless, at 17.7mn units (saar), US auto sales remain robust. And with the balance of auto loans peaking recently above $1 trillion, there are growing concerns about asset quality. For now, delinquency rates are low. However, given the 35% rise over the past four years in low-credit-score auto loans, the risks are increasing of a more serious deterioration in the event of an economic slowdown.
This is precisely the base-case scenario that prompted Goldman Sachs to downgrade the US auto sector and to warn that the US auto cycle has finally peaked. As for record global auto sales, the question now becomes how much longer China can carry the world on its shoulders as it redirects its bubble-creating might to yet another asset class, and how the global manufacturing base will respond when this latest bubble shortly bursts too.
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