Sales of cars could overshoot demand; job growth was still solid; global indebtedness vs. global growth
“The industry cycle has peaked.”
Auto sales: Unmoved For the first full year since the depths of the 2008-9 Great Recession, U.S. sales of cars and light trucks fell, to 17.76 million units for 2017, down 290,000 from the previous year. Explanations vary from improved quality, longevity and completion of a long-delayed replacement cycle, to rising interest rates, trouble in the sub-prime auto loan market and a buyers’ pause to evaluate rapidly-improving all-electric vehicle technology. Increased discounting didn’t stop the downturn; the average discount from sticker prices, according to one estimate, has now reached over 11 percent. One mitigating factor for manufacturers: passenger cars make up only about 30 percent of the overall market; the rest are higher-margin trucks and SUVs. But any shift in the mix due to changes in fuel prices or overall growth will likely be felt acutely both by manufacturers and dealers.
U.S. jobs: Throwing the curve Payrolls grew by a disappointing148,000 in December, totaling a drop of 9,000 jobs over the last two months of the year. The unemployment rate stayed at 4.1% and the participation rate remained at 62.7%. Average hourly earnings rose 2.5%, meeting expectations but disappointing observers hoping to find evidence of increased upward pressure on wages – and an eventual follow-through in the overall level of inflation.
Friday’s figures add some fuel to the argument that employment and inflation may no longer be tightly coupled. The relationship between the two, shorthanded as the “Phillips Curve”, has been a mainstay of Fed policy for decades. No less a figure than James Bullard, President of the influential St. Louis Fed, has suggested that the link is now broken – ironically, due to the effect on expectations of setting an explicit target rate for inflation.
Global borrowing: Debtors’ prism Global indebtedness rose to a historic record $233 trillion in Q3 2017, according to the Institute of International Finance. But when compared to the size of the world’s economy, indebtedness has now been falling for the fourth quarter in a row and now is 318% of global Gross Domestic Product (GDP), 3 percentage points below the high set in Q3 2016.
The reasons for the decline are a mixed bag, from synchronized global growth, rising inflation in China and Turkey, and China’s own efforts to prevent a destabilizing buildup of borrowing. But the bottom line is that at least for the present, the global economy appears to have gotten a start on growing and reforming itself out of debt.