As you can probably tell from previous posts, I like he Currency Strategy Team at Brown Brothers Harriman. I do not always agree with them – I am generally dollar bearish, whereas they are not – but I do like their analysis. Marc Chandler and his team are out with a fairly bullish note on the auto sector and how May auto sales point to upside surprises for retail sales and the U.S. economy. I tend to take a more sceptical view about retail sales (balance sheet recession?), but their point of caution on the employment impact of auto layoffs to seven states is duly noted. I do not discount their views one bit. Here is what Chandler has to say (I have added bold to the bits I find most interesting):
May auto sales were stronger than expected at a 9.9 million annual unit pace. In the same week GM filed for bankruptcy, domestic auto sales rose to 7.4 million, the highest since December (Q1 average was 6.8 million). There are several, even if underappreciated, implications. First, the inventory overhang in this sector appears to be easing and production looks to be below the level of sales, so this may help underpin manufacturing in the months ahead. Second, the increase in auto sales likely points to a stronger than currently anticipated retail sales report, which is expected June 11th. The early consensus is for a 0.2% increase on the headline and ex-auto components. Look for economists to revise up their forecasts after tomorrow’s chain store sales. Gasoline prices rose a little more than 20 cents in the month.
Two other factors may also support retail sales. First, the weather generally improved, which often helps retail sales. This is after the March-April distortions from Easter. Second, last month the bulk of the one-off $250 payments to Social Security recipients were sent out. This is of course on top of the more than 5% increase since January in cost-of-living, tax refunds, and a reduction in the payroll withholdings.
The bankruptcy and shrinkage of Chrysler and GM will have implications not only on their employees. Remember there are more than three-quarters of a million workers in the auto parts industry. A rough rule of thumb is that every auto job supports roughly 4.5 jobs, not just parts jobs, but other jobs that service auto workers and their families. Seven states in particular will bear the burden. For them the auto manufacturing industry hired more workers than any other private sector. These states are Michigan, Indiana, Kentucky, Missouri, Ohio, South Carolina and Tennessee.
At the same time, however, do not over exaggerate the significance. There are some pundits who see the demise of GM (and Chrysler) as a sign the US is no longer the dominant auto manufacturer and yet another symptom of the decline of the US (and the role of the dollar). While such sentiment appears prevalent, it seems more than a little exaggerated.
The US dominance in autos has long ceased and the bankruptcy of GM and Chrysler is not the cause of that loss of dominance, but rather its reflection. While there will be social and economic consequences, autos have become nearly a commodity with Chinese and Indian producers able to make a car for under $5,000. The US market is mature. There is nearly a car for every licensed driver in the US. Thus far this year, China has sold more cars than the US has. This is also true in several other industries, where the market is mature and penetration rates are high.
But this should not be confused with a de-industrialization of the United States. Before the recession, so far on par with the 1980s contraction, the US industrial output was $2.8 trillion. This is more than the combined dollar value of Japanese and Chinese industrial output. The value-added of automakers and suppliers is about 5.5% of GDP. By comparison, computers and electronics value-added accounts for a little more than 7.5% of GDP.
The point is that the bankruptcy of GM and Chrysler is not an existential challenge for the US. It does not threaten its industrial or manufacturing prowess. The US will have to re-deploy its resources and move to more value-added sectors. The flexibility of the US capital and labor markets will make it easier to do just that than in most other countries.
Marc Chandler, Global Head of Currency Strategy
Originally published at Credit Writedowns and reproduced here with the author’s permission.