Autos show the difficulty in navigating bottlenecks, pricing and demand
US auto sales right now explain everything.
They're the intersection of high consumer demand, inflation, covid quirks and bottlenecks.
Sales plunged at the beginning of the pandemic on economic uncertainty, retail shutdowns and plant shutdowns but there was a sharp v-shaped recovery. Consumers quit public transit, moved to the suburbs and demand for auto sales leaped. The dumping of rental car inventory followed by a sharp rebuilding added to the skews.
Almost immediately, prices began to rise, first in used cars and then in new cars. The CPI report released today showed new vehicle prices up 7.6% y/y. I'd argue that understates the current environment, where car salesmen will flat out refuse to negotiate on prices.
The demand for new cars hasn't ebb but sales have suddenly plunged. Why?
As prices rose, consumers got sticker shock. In addition, car lots are empty so shoppers have nothing to buy. Much of that is in the pipeline with people buying cars for delivery six months into the future. Those sales aren't counted until they're delivered.
With all the demand, automotive companies are trying to fill car lots but can't because of chip and component shortages. Recent commentary from automakers suggests it could be well into 2022 before there's any relief.
More than any economic data point, I'm looking forward to further commentary from automakers on the state of demand.
The risk though is that consumers begin to balk the longer they wait. Currently this is a 'demand delay' story but it could eventually be 'demand destruction' especially if prices stay high.
The good news for the Fed is that the drop in sales is indicative of a consumer that has stable inflation expectations. Put another way, if consumers were anticipating that auto prices would be much higher in six or 12 months, they would still be buying here. Instead, they're waiting because they're confident prices will be flat.
Of course, the consumer could be wrong and that's another reason I'm watching auto commentary very closely. That's one of the most-competitive industries in the world and it will be tough to jack up prices even in a high-demand environment. But carmakers are facing component and raw materials increases and will have to pass some of that on.
The risk is that they do raise prices and continue to raise them even if demand stays tepid. That's a classic stagflationary environment and it's something that will show up early in autos.