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COMMENT: Better news comes with caveats

By Dave Leggett | 5 May 2010

Dave Leggett

Dave Leggett

April's light vehicle sales figures for the US appear to confirm that the gradual US economic recovery is on track. That a seasonally adjusted annualised running rate of 11.2m units for the month is widely viewed as being in line with the upturn we can expect tells its own story.

This is an upturn from a very low base. But a SAAR of 11.2m is still a significant improvement on the 9.2m level seen in March of last year. We are, at least, moving in the right direction.

And a raft of very positive Q1 financial results from big suppliers last week is another indication of better times. Indeed, vehicle production levels have surged this year in North America as demand has picked up and vehicle manufacturers have sought to rapidly rebuild depleted stocks. That has quickly fed into much improved production schedules and boosted financial results for suppliers.

Looking forward, JD Power forecasts that North American vehicle output in the second quarter of 2010 will be up 56%, compared with last year, with volume at 2.8m units.

As a result of low inventory and a robust selling rate, JD Power forecasts that North American vehicle production in 2010 will reach 11m units. That represents an increase of nearly 30% from just 8.5m units in 2009.

But forecasters are staying cautious on the strength of the recovery to underlying demand. Unemployment remains high. Confidence, if improving, could be fragile.

And widespread sovereign debt is kicking around in the background as something that threatens to get ugly in some parts of the world. An emergency deal has been arrived at to patch up severe pressures in Greece.

Many other countries, too, face a big challenge in lowering national debt in the future. The standard remedial action – higher taxes and/or lower public spending – threatens to dampen economic activity further out. If interest rates were to rise significantly too quickly, all bets are off.

And as recent events in Greece have demonstrated, austerity budgets are a medicine that some countries' populations and (ultimately) governments may not want to take. And the markets will react badly to that and to any potential problems for the banks that have done the lending. We have been there before.

Something else to keep an eye on is China's booming economy. The authorities there are keen to dampen what they see as 'overheating'. A credit squeeze has begun. Chinese manufacturing grew at a slower pace in April according to a survey of more than 400 companies, indicating that Beijing's efforts may be taking effect already. Let's hope they get the delicate balancing act right. The auto industry in China has enjoyed phenomenal growth over the past two years and will surely be vulnerable if China's economy slows sharply later this year (when vehicle market year-on-year growth rates will be easing anyway). 

So, yes, there is some much better economic and market news around. But, as ever, there are a few concerns in the background to temper it.

Dave Leggett

US: Car sales rise almost 20%