Falling auto sales

As almost all of Wall Street tries to second-guess the Federal Reserve the battle lines have been drawn between those analysts with an optimistic disposition, those with a sceptical outlook on life and those who are downright pessimistic about everything. With views and opinions bouncing around it’s almost impossible for the average investor or observer to try and arrive at a conclusion either way about what the future holds for interest rates.

Indeed, last week I reported on two research reports from analysts at opposite ends of the optimism/pessimism scale. At one end, SocGen’s resident perma-bear Albert Edwards warned that the beginning of the week that the US economic recovery is on shaky footing and it is only a matter of time before the recovery sputters to a halt and a recession takes hold. Then, a few days later one of Deutsche Bank’s most senior analysts published a report boasting about the health of the US economy concluding there are no obvious signs of a recession on the horizon.

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Fall auto sales may indicate rising unemployment

This week it would appear it’s the turn of MKM Partners to warn of trouble ahead. In a note to clients Michael Darda, Chief Economist & Market Strategist at the research outfit opines that current figures suggest the employment cycle may be coming to an end, which may lead to an increase in the unemployment rate over the next six to nine months.

Fall auto sales may indicate rising unemployment

Michael Darda’s claim is based on the relationship between US auto sales and unemployment. Specifically, also sales on an inverted scale tend to lead the unemployment rate by six to nine months. The linear relationship (correlation) between these two variables dating back to the 1960s is 0.8 (r=0.8). US auto sales appear to have peaked earlier this year, which would be consistent with the six-month to nine-month time lag generally seen in the past few market cycles. The August jobs report showed a 150k rise in payrolls, significantly below forecasts and marginally below the 175k six-month moving average.

Auto sales falling Falling auto sales
Falling auto sales

Falling auto sales – recession?

When considered in a vacuum, these numbers appear to show the beginning of deteriorating economic fundamentals. Still, whether or not MKM’s forecast for a near-term recession based on these numbers will play out remains to be seen. However, it’s clear that the weak-than-expected jobs figure will give the data dependant Fed some food for thought when considering if it should hike interest rates again later this year. Although it’s likely policymakers will want to wait for further clarity on the figures following revisions to June and July’s job market data. A combined total of 564k jobs were added across June and July according to revisions. In comparison, August’s figures were well below these totals but many economists were expecting a slowdown in job creation after the summer.