Global Auto Market Woes Persist According To IHS Markit

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by: Eric Basmajian
Summary

Nearly every industry in a downturn is citing the auto market as a source of weakness.

According to the Europe sector PMI, the auto industry PMI index is at a 72-month low of 43.2.

While some analysts have an issue with PMI data, this level of consistency, ratified with hard economic data from the employment report, cannot be ignored.

Global Auto Market Woes Persist According To IHS Markit

IHS Markit recently released four reports that cited major weakness in the global auto sector, a theme I have been highlighting for several months. IHS Markit published the Global Aluminium Users PMI, the Global Copper Users PMI, the Global Steel Users PMI, and the Europe Sector PMI.

Some analysts take exception to the IHS Markit PMI data reports. While I certainly do not use Markit as my only source when I see a stunning level of consistency across survey data, in-line with the economic sequence that I highlight that is ratified by reliable economic data from the widely trusted and used Employment Situation Report from the BLS, I take note.

I will quickly highlight the commentary from IHS Markit's reports on the auto sector and circle back to an analysis on the employment report I provided members of EPB Macro Research last week that emphasized some of the declines we are watching develop in the auto sector.

Global Aluminium Users PMI:

Source: IHS Markit

Starting with the Global Aluminium Users PMI, which is an index of compiled responses to questionnaires sent to purchasing managers in manufacturers identified as heavy users of aluminum, we see the auto sector cited as a source of weakness.

By comparison, new orders at global aluminium users declined at a faster rate during April. The pace of decrease remained modest though and softer than the average for the first quarter. New work from abroad also fell at a sharper rate than in the previous month. Regionally, demand at Asian and European users remained in contraction territory, with panellists partly attributing this to a sustained decline in new orders from the car industry.

Source: IHS Markit

If we flip over to the Global Copper Users PMI, which is an index of compiled responses to questionnaires sent to purchasing managers in manufacturers identified as heavy users of copper, we hear a similar story.

Global Copper Users PMI:

Source: IHS Markit

Companies noting a downturn in overall sales attributed this to weaker economic conditions, in part impacted by the trade war between USA and China. In addition, firms continued to report weak order book volumes from the automotive industry.

Source: IHS Markit

The last report released as far as industrial metals was the Global Steel Users PMI.

Global Steel Users PMI:

Source: IHS Markit

Total new orders at global steel users dropped for the seventh consecutive month in April, with the rate of decline unchanged since the end of the first quarter. Panellists attributed the fall in new work to weaker demand from the car industry and from foreign markets.

Source: IHS Markit

If we move over to the Europe Sector PMI report, the downbeat commentary on the auto sector continues.

Europe Sector PMI:

Source: IHS Markit

The European automobiles & auto parts sector remained in a strong downturn in April. Output, new orders and employment all fell sharply since March, and negative contributions from indicators for suppliers' delivery times and stocks of purchases drove the headline PMI figure for the sector to a 76-month low of 43.2. Moreover, output expectations at autos and parts firms were the most pessimistic since November 2012.

Source: IHS Markit

I understand why some analysts dismiss IHS Markit PMI data, but when commentary is this consistent after it already lines up with previously outlined declines in sales, production, hours worked and employment, ignoring the information is risky.

For those who disprove of data from IHS Markit, after the employment report, I published my full analysis and highlighted the downbeat trends in the auto sector.

Here is what I wrote:

A few weeks ago, I highlighted the auto sector as one of the areas of the entire global economy that was responsible for the global manufacturing downturn. That thesis continues to develop and strengthens as more data unfolds.

The following chart shows the average weekly hours plus overtime hours for production level employees in the transportation sector. The nominal hours are presented on the right-hand axis in bar chart format while the year over year growth rate is on the left-hand axis in line chart format. The past four months have shown a rapid decline in the hours worked in the transportation sector, something dragging the aggregate manufacturing sector lower.

Average Weekly Hours + Overtime Hours For Production Workers: Manufacturing - Transportation:

Source: BLS, EPB Macro Research

Going one layer deeper, into the motor vehicles sector, shows an even more pronounced decline in total hours worked. The year over year decline in total motor vehicle hours is exceeding 3.70% year over year and the declines are accelerating in recent months.

Average Weekly Hours + Overtime Hours For Production Workers: Manufacturing - Motor Vehicles:

Source: BLS, EPB Macro Research

If we strip out overtime hours and look solely at full-time hours worked in the motor vehicle sector, we see declines in excess of 4% year over year and a precipitous decline in the nominal hours worked.

Average Weekly Hours For Production Workers: Manufacturing - Motor Vehicles:

Source: BLS, EPB Macro Research

The average weekly hours always leads to broader employment because it is less binding and less costly to reduce hours worked than to layoff and rehire new employees when there is a shift in demand.

If hours worked decline and demand does not rebound, the only next step is to lay off workers.

In the past six months, we have seen four monthly declines in motor vehicle production level jobs and the year over year growth rate has moved negative. This highlights that there are less motor vehicle employees today than the same month last year, something that has not happened other than for one month in late 2016.

Production Employment - Motor Vehicles (%):

Source: BLS, EPB Macro Research

The decline in the auto sector is absolutely clear. I will continue to monitor this sector and we are likely to see further declines in auto production which will drag industrial production lower.

For a deeper analysis of the auto sector, you can read my full-length analysis in a previous note by clicking here.

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. I have no business relationship with any company whose stock is mentioned in this article.