Automotive Production to See Slower Growth
Twelve-month total vehicle sales increased in a straight-line fashion to 16.2 million units in June from 10.5 million units in November 2009. This total has been higher than 16.0 million units for three consecutive months, and the current rate is the highest it has been since February 2008. In fact, this rate has only been exceeded during the period March 1999 to February 2008 and in the single month of December 1986. Clearly, this is fantastic news for the automotive industry.
While total vehicle sales are still below peak levels from the late 1990s-mid-2000s, outstanding automotive loans are at their highest level ever. The current total is close to $900 billion in debt—more than 10 percent higher than the previous peak reached prior to the most recent financial crisis. The average amount financed per car and the average monthly loan payment (despite record-low interest rates) also are at all-time highs. Real median household income, however, has been in decline, and household net worth is down 36 percent over the last 10 years.
How are consumers able to increase the amount of their automotive loans? Car loan terms used to be a maximum of three to four years, but the average term now is more than five years. To top it off, many of these new car loans are sub-prime loans, meaning there is a significant chance they will not be repaid. So how long can vehicle sales remain this strong when the median individual is suffering from a lower real income? What happens if interest rates rise?
Currently, automotive manufacturing remains strong. Motor vehicle and parts spending continues to grow at a reasonably strong rate. Vehicle and parts production also is still growing at a historically strong rate, although the production rate has slowed dramatically the last two years. It appears that production will continue to grow at a slower rate for the remainder of 2014 and perhaps into 2015.
Slower Growth in Electronics
Consumer spending on electronics is hitting record highs in 2014, as it has been almost every single year and every single month. Despite these record highs, however, the rate of growth in electronics spending has been decelerating since the early part of 2013. In fact, other than the period from just after the collapse of Lehman Brothers in the fall of 2008 to the spring of 2010, consumer spending on electronics has not grown at this slow of a rate since early 1993. And the trend in real disposable income seems to be indicating a further slowing in the rate of growth of consumer spending on electronics.
As a result of the slower growth in electronics spending, electronics production also has been growing at a significantly slower rate. Other than the two major recessions of 2001 and 2009, electronics production has not grown this slowly since the summer of 1992. Given the trends in disposable income and spending on electronics, the expectation should be that industrial production of electronics will see even slower growth for the remainder of 2014.
Our business index shows that the electronics industry has grown five of the last six months. However, in June, new orders contracted for the first time this year. At the same time, production seems to be on a generally rising trend since early 2013. Therefore, backlogs contracted sharply in May and June. Exports have increased in two of the last three months, which may help offset the slower growth in spending on electronics in the U.S. Also, future business expectations have taken a hit the last two months.