2019 US auto market may be better than expected

As I expected, U.S. demand for motor vehicles diminished in the first half of 2019 when compared with the same period a year ago. But the decline has been more modest than I originally thought it would be, at least so far.

In December, I wrote that the industry's numbers for 2019 would still be good by historical standards, just not quite as good as they had been in the recent past. I forecasted a decrease of 4 percent in both total U.S. motor vehicle assemblies and also light vehicle sales in the U.S. in 2019.

Vehicle sales had exceeded the robust annual total of 17 million units for the previous four consecutive years. I reasoned that consumer fatigue combined with higher interest rates and rising gas prices would offset the positive trends of higher wages and employment levels. The net result would be a moderate decrease, something like 4-5 percent, in demand for motor vehicles and parts.

Now that we are at halftime, I am raising my forecast for this year to a decline of just 2 percent. I am pleased to report that overall business conditions for the auto industry in the first half of 2019 were better than I expected, and I now must at least consider the possibility that conditions could improve in the second half of this year. Things could get worse, for sure. But some upside risks are also emerging.

I start my analyses and forecasts of the motor vehicle industry by looking at the trend in the monthly assemblies data. I have found it to be a better indicator of demand for domestically produced plastic auto parts. It is a manufacturing-based data series.

According to the Federal Reserve Board, total motor vehicle assemblies are down a little less than 2 percent through the first five months of 2019 when compared with last year. A close look at the chart reveals that the line ticked up a notch in May. This is because the number of assemblies last month registered a nifty gain of 8 percent when compared with the previous year. The highest probability is the data will revert in June and this uptick in May will be a blip in the trend. But then again, such upticks sometimes portend longer-term changes in momentum.

The trend in the light vehicle sales data has a similar pattern. Total sales were modestly down by just over 1 percent through the first five months of 2019. But in May, the trend reversed a bit as the sales figure increased by 3 percent when compared with last year.

These sales totals include sales of both imported and domestic vehicles, so I consider it a good indicator of U.S. consumer trends rather than trends in American manufacturing. Consumer demand is important, but some of the major vehicle manufacturers are rethinking their longtime practice of reporting sales on a monthly basis. They have started to report sales data quarterly instead, so this data is becoming less transparent.

Less transparency is never an improvement, but I can only play the hand I am dealt. And with the first half of the year now behind us, the trends in this market look pretty good. I do not expect at this time that the upticks in the data we got in May will be sustained. But the trends in many of the factors that affect overall demand for motor vehicles are better than I expected they would be, and I believe these trends will continue to prevail.

At the beginning of this year, I predicted U.S. employment levels would continue to improve throughout this year and this would result in a gradual acceleration in wage growth. Both of these forecasts have been spot-on through the first half of this year.

But my forecasts for the trend in interest rates and the price of gasoline in 2019 have both turned out to be too pessimistic. Real interest rates have steadily declined through the first six months of this year. And the real surprise to me is that most analysts now expect the Fed will now start to cut interest rates. This is a huge contrast to the situation at the beginning of this year when there were widespread expectations of another two or three hikes coming in 2019.

The price for gasoline started this year in an uptrend, but fuel prices have declined for the past two months. They are now at a level that is well below the average prices paid in 2018. Obviously, this trend can be volatile, but at current levels, gas prices are still quite supportive of strong demand for the more profitable types of the domestically produced SUVs and light trucks.

As always, the question is, "So what happens next?" As we approach the halfway mark of the year, the dominant economic stories are the trends in interest rates and the trade situation, particularly with China. These stories present risks to the outlook, but there is both downside and upside risk.

I do not advise managers in the plastics industry, or any other manufacturing segment, to attempt to get in front of the interest rate decisions of the Federal Reserve. That is the function of the bond market, and right now, the bond market says that interest rates are going down. That should be good news for the auto sector, so it is an upside risk to the forecast.

As for my outlook on the trade disputes, I am rapidly coming to the conclusion they are more of a political platform and less of a real economic strategy. I have strong disdain for the pervasive economic tactics of the Chinese government, and I believe we need an aggressive strategy to address and counter these tactics. However, the next election appears to be more important to President Donald Trump than our long-term economic strategy, and I expect a trade deal with China will be announced by the end of this year. It will be Trump-eted as the greatest deal ever.

A trade deal with China, the ratification of deals with Canada and Mexico and lower interest rates should combine to give the U.S. economy a substantial boost as we head into 2020. These are the upside risks to the outlook.