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Peak Auto Part II: The Classic Economic Cycle


  • Auto sales have likely peaked for this economic cycle.
  • A simultaneous contraction in auto sales, housing data and big-ticket consumer spending is part of how the classic economic cycle develops.
  • As a composite basket, autos, housing and durable goods consumption have contracted for the first time this economic cycle; a warning sign for the health of the business cycle.
  • This idea was discussed in more depth with members of my private investing community, EPB Macro Research. Start your free trial today »

Peak Auto Part II: The Classic Economic Cycle

Total vehicle sales is one of many classic leading economic indicators of the business cycle. Vehicle sales historically peak preceding recessionary periods due to the relatively large sticker price of the good in the consumer basket, the sensitivity to interest rates, and the economic concept of pent-up demand.

Classic economic indicators that tend to lead turning points of the business cycle have these three characteristics.

I wrote an article several weeks back, "Peak Auto" that discussed these trends and linked the data to several popular auto stocks. These trends are also topics discussed in great detail in my marketplace service, EPB Macro Research.

Other indicators that fall into this bucket include housing and big-ticket consumer products such as home appliances which can be proxied through durable goods consumption, found in the personal income and outlays report released by the Bureau of Economic Analysis.

While I will only touch on housing and durable goods consumption very briefly in this note, both of those categories, in combination with auto sales, provides one of the best baskets of leading indicators for the classic business cycle.

A peak and subsequent decline in auto sales, housing sales and durable goods consumption that is pronounced and persistent has historically led nearly every business cycle.

As with all leading indicators, there are times throughout history where one indicator as a stand-alone metric fails to forecast the business cycle. This, of course, is the case as if it were not, we all would have found the one metric that predicts every turning point. This is clearly not a realistic assumption so when looking at leading indicators of the business cycle, we must look at these three critical sectors in combination. While one indicator may fail, the probability of all three of these sectors providing a false signal is significantly

Do you want a look at this classic economic indicator as well as other reliable leading indicators of economic turning points?

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This article was written by

Eric Basmajian profile picture

Eric Basmajian is the Founder of EPB Macro Research, an economics-based research firm focusing on inflection points in economic growth and the impact on asset prices. He was previously an analyst at a quantitative hedge fund.

Eric leads the investing group EPB Macro Research where he applies investing strategies with the understanding that when there is an economic inflection point, company fundamentals don’t matter, technical trends break down and investors are blindsided. His analysis helps investors position their portfolios to avoid losses and maximize gains during changing economic conditions. Learn More.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (22)

naww ....its Godzilla .....cant kill it
Spot the DJ profile picture
With all the bad data - the market continues to be pump to the moon. I guess prominent investors told Feds to be quiet and make it so.
Mr Basmajian,

I enjoy reading your articles. You have been sounding the alarm on the economic cycle rolling over for some time now. But I continue wonder if you are subconsciously fitting the evidence to the conclusion you wish to see. I don't think you actually are, but I continue to doubt.

I would find your argument much more compelling if you wrote an article that tried to disprove your thesis. Does data exists to support the counter argument?

Eric Basmajian profile picture
The economic cycle takes time to develop. Inflection points in the cycle can take 12-36 months. I use a highly consistent data set and do not do anything near what you described. At all.

These are not S&P 500 timing tool or entry and exit point models. If you know of those, let me know.

I study economic cycles and the economic cycle turned globally in late 2017, early 2018. The call is correct. The stock market is not the barometer of a successful call. Look at interest rates, look at global stocks.

And for what it's worth, since the cycle rolled over in early 2018, the S&P 500 has been outperformed by rolling 3-month CDs....
Also it's amusing to see that global QT (officially starting in October 2018) could not even make it 3 months before the central bankers started crying uncle and reversing policies.
I also think the call is correct and that your commentary is good. I just think the argument would be stronger if you sincerely tried, and couldn't find strong evidence, of the counter point.

Best wishes
Aricool profile picture
the Heavy Weight Trucks sales does seem like it is near its 2006 peak if we look at the absolute #s instead of YoY change:

however, I wonder if that momentary down trend is noise b/c the opposite trend is seen in Ford F series truck sales, which are still going strong, and those are primarily bought by small business and contractors:
You are a great source of perspective because you are not talking some book like economists from a lot of houses that will remain unnamed here. And then we have the FED, who owns the world record for self congratulation.
once again great article, appreciate it....

a while back i actually dubbed this bull market "Godzilla"

no matter what gets thrown at it the bull just keeps running,
even in the face of a slowing economy....weaker earnings .....fed tightening....trade war....global slowdown.....flat yield curve.....valuations ....etc etc...just keeps wanting to run even now it wont stay down.....

speaks to the strength of this market ....
@fxdp You're right, big rebounds and quickly, most recently the gaming stocks this week. Look at EA. Wanted in on that and missed it.
The 30 year mortgage rate peaked during November, 2018 at 4.94% and has dropped to 4.41% in early February, 2019. That 1/2% drop might be enough to increase existing home sales and new home sales. Auto loan rates also slightly decreased. Perhaps we have not reached the peak in sales.
thanks for the Article, Eric. Very telling on the trend going forward
Not only is peak auto a concern,but how we got here. Would love to know how many people financed an auto at 7+ years in 2000,and 2007 compared with today,not to mention the inflated cost of the best selling vehicles.Of course more people are buying trucks and SUVs now than cars,its not just preference,its because people feel like they can afford them.

Autos have always been a depreciating asset,but now people are upside down,further and longer.Thats all well and good as long as the money is flowing.
One also has to wonder how sustainable it is/was for so many folks to opt for 7-8 year financing with low down payment (so underwater on loan for close to 5-6 years). I mean geez, there was a time folks were paying their houses off sooner than that (heck houses were cheaper then too ha ha).

When where the houses so much cheaper?
Back in the 70s/80s many areas had houses selling for < $40,000. Heck, even in 2009 - 2011 folks were buying up bank tapes of houses averaging around $40,000.

So you measure how cheap the houses were in dollars? Are you aware that the dollars today are not the same as dollars in 1960s?
Arsenal26 profile picture
That we are at peak auto sales seems most likely. The important question is what does this mean for auto stocks. Have the recent price declines discounted a fall-off of sales to come? Is it indeed time to buy auto stocks for the longer run? Dividends are good and the pay for waiting for the next cycle is large. Stocks are cheapest when the outlook is darkest. Can the payouts continue to be supported? Where we are in the economic cycle doesn't matter. Where we are in the stock price cycle does.
Electric plus robots has created a revolution that makes auto investing a very different game. Toyota feels like the ticket.
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