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Late-Stage of Business Cycle?

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Investors need to consider a variety of factors in gauging risk and reward. One of those factors is where the economy lies on the business cycle. Risk is lowest and reward is highest in the early-stage of business cycles and vice versa.

One way in estimating if the economy is in the early, mid or late-stage on the business cycle is to look at automotive sales. They are big ticket items, after all. The decision to buy an automobile is not taken lightly. Budgeting is often required. The thought process often begins months if not years in advance. As a result, automotive sales are a measure of consumer demand. Financing is often required, too. This requires consumers to also take into account what interest rates are and which direction they are headed. In other words, auto sales are also a gauge of the credit cycle.

Auto Sales Have Plateaued

A Ford executive told analysts back in September, “We think sales have reached a plateau . . .” That was confirmed earlier this month when Ford reported March sales fell by around 7% from a year ago. Fiat Chrysler’s sales decreased by almost 5%. GM grew sales by almost +2% but this was noticeably less than the lofty +7% expectation. Automotive demand is down despite the huge discounts or incentives being offered to slash surplus inventory. In fact, the incentives are comparable to what was offered during the Global Financial Crisis. According market research firm J.D. Power (emphasis added):

Incentives as a percentage of MSRP are 10.4%, exceeding the 10% level . . . for the first time since 2009 [when] it reached 11.3% as the industry was navigating the financial collapse . . . the average number of days a new vehicle sits on a dealer lot before being sold . . . reached 70 . . . the highest level . . . since July 2009 (80). – J.D. Power (March 24, 2017)

Heavy-Weight Trucks

When looking at automotive sales data, I found they indeed correlate with the economy. I also found it is fraught with weird spikes both up and down that don’t seem to foretell anything important. With the intention of better understanding where we are in the business cycle, I thought it would be better to focus on the buying behavior of businesses. This led to me to focus my attention on heavy-weight trucks in gauging where the economy lies on the business cycle.

Heavy-weight trucks, those weighing more than 14,000 pounds, are used in the transport of goods. More trucks on the highway is an indication of more goods being sold and shipped, and more work and jobs at factories. Hence, trucking serves as a barometer of where the economy lies on the business cycle. According to American Trucking Association, trucking represents 70% of tonnage carried by all modes of domestic freight transportation. With that in mind, heavy-weight truck sales may be a better route in studying business cycles. In fact, data looking back almost 50 years demonstrates heavy-weight truck sales are indeed a reliable indicator of business cycles.

Business Cycle, Credit Cycle, Heavy Weight Trucks, Auto Sales, Automotive Sales, Recessions, Truck Sales,

Unit sales of heavy-weight trucks on a rolling 12-month basis having fallen by more than 10% have preceded or led the start of the past 4 recessions by 3 months, on average.

The graph above illustrates the heavy-weight truck unit sales on a 12-month rolling basis. The bars are green when 12-month unit sales grow by more than -10% compared to the year before. The bars turn red when 12-month unit sales grow by less than or equal to -10%. Hence, the red bars are indicative of a double-digit drop in unit sales.

Late-Stage of Business Cycles

As you can see from the graph above, every recession (grey shaded areas) is either preceded or coincided by a peak or plateau (yellow curved arrows) in heavy-weight truck unit sales. The 6 peaks average 457K heavy-weight trucks on a 12-month basis. In the first two recessions that began in 1970 and 1974, a double-digit drop in unit sales (red bars) occurred either during or immediately after the recessions. In other words, a double-digit drop in unit sales was not all that helpful in predicting when the business cycle had turned over in those first two recessions.

Things changed in the following recessions. Assuming the “twin recessions” of the early-1980s was really just one recession, then the past 4 recessions began in 1980, 1990, 2001 and 2007. Each and every one of them were preceded or led by a double-digit drop in unit sales. Furthermore, they led recessions by an average of 3 months.

Déjà Vu?  

12-month unit sales in March 2016 reached 454K. This was very close to the 457K average mentioned earlier regarding the 6 previous peaks. Unit sales, since March 2016, have fallen for twelve consecutive months. More recent data also shows that a double-digit drop in unit sales has occurred in each of the past 4 months. This exceeds the 3-month average that has normally led to recessions. Furthermore, the most recent data for March 2017 shows a rate of decline of almost 16%. This may prove significant because a 16% decline is quite large. In fact, a 16% drop has always coincided with recessions.

Heavy-weight truck sales have been a reliable gauge of where the economy lies on the business cycle. If that remains to be true, then it sure looks like the current business cycle may have already turned over. This could impact the value of your investment portfolio if circumstances do not improve. Please consult your investment fiduciary before making any investment decisions.

Meritocracy Capital Partners Inc. is a boutique investment management firm & portfolio manager that aligns itself with its clients. We build trust & accountability by providing a fee structure driven by performance and by having our money invested right alongside our clients’ money. As a result, we treat our clients’ money like our very own.

We work with high-performing professionals and entrepreneurs that seek a value-focused and performance-driven approach to how their wealth is managed. You can reach us at 778-807-8560 or on our Contact page.

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