GRAND RAPIDS — Despite a relatively stable outlook for the automotive sector, industry experts have started noticing evidence of “stress fractures” appearing in an otherwise healthy market.
That’s according to Mike Wall, director of automotive analysis at IHS Markit, who said a combination of increasing dealership inventory levels and the greater use of incentives to move vehicles off lots could point to potential volatility for the industry.
“Inventories and incentives are creeping up,” Wall said speaking yesterday at the annual West Michigan Automotive Suppliers Symposium, hosted by Grand Valley State University. “If you’re uncertain about that, go to a dealer and talk to them. They will bend over backwards to get you into a car, and that includes cash on the hood. I don’t want to create too much of a panic around it, because it’s not like it was back in 2007 as we were going into the recession. There’s more discipline to it, but it has heated up.”
Even with inventories and dealership incentives on the rise, Wall predicts North American light vehicle production to reach 17.6 million units this year, down slightly from the 17.8 million units produced in the region in 2016. Despite the slight dip in production this year, IHS Markit research shows North American production levels climbing in the coming years, peaking at approximately 18.7 million units in 2023.
Light vehicle sales are expected to pull back slightly to 17.4 million units this year, compared to the 17.6 million units sold in 2016. Unlike production figures, which are projected to climb through 2023, sales should slow modestly before stabilizing around 17 million units in 2023, according to the IHS Markit data.
Despite the positivity in the market, Wall cautions that “trade-friction” could induce a downturn in the automotive economic cycle. Those challenges stem from the Trump administration’s call to enact significant changes to key trade policies, such as the North American Free Trade Agreement, or NAFTA. While it’s unclear how those changes would unfold, many in the automotive industry believe shifts in trade policy could disrupt key global supply chains that automakers rely on to keep vehicle costs down.
In particular, Wall points to the Trump administration’s proposal of a border tax as one shift in trade policy that could have unforeseen consequences.
“I think some in Washington don’t fully realize how many times these parts are crossing the border,” Wall said. “When we talk about assessing a tax on the border each time, it’s not as easy as that. There are parts that can start out as a stamping here, become a more manual labor-intensive assembly in Mexico, come back here to have another process applied that is more capital intensive, and then go back to Mexico for more manual labor.”
While it’s likely the automotive market will remain stable in the short term, IHS Markit predicts a 25-percent chance of a recession “induced by strained trade relations.” If that occurs, U.S. light vehicle sales could decrease to 15.2 million units in 2018.
“We’re not in the business of forecasting recessions, per se, because it’s a fool’s folly,” Wall said. “What we can do is (determine) what the market will look like in a recessionary scenario, and that’s what we want to focus on. … Consumer confidence is still strong, credit availability is still quite strong, we have a housing market that’s on this recovery path.
“It’s been a net positive, but the negatives are beginning to creep up a little bit again.”