Uncategorized

Driving GDP

| April 30, 2021

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

No supply chain disruption has been more consequential this year than the semiconductor chip shortage plaguing motor vehicle makers.  Consumers and businesses showed robust demand in the first quarter, but automakers had to curtail production beginning in February.  The BEA recorded a massive drop in motor vehicle inventories, a key limit on the still-hefty first quarter real GDP gain.  But production issues are likely to persist through the spring, and, at some point, the lack of inventory will also begin to crimp auto sales.

Production issues

Motor vehicle production was relatively normal through January, but, beginning in February, shortages of critical computer chips forced manufacturers to slow down or halt assembly lines.  Automakers adapted as best they could, shifting the limited supply of chips to their most lucrative models.  In unit terms, motor vehicles went from running between 10 million and 11 million units annualized through January to around 9 million units in February and March, resulting in a drop of close to 10% in first quarter unit assemblies.  Nevertheless, to the extent that automakers shifted production to higher-priced, more profitable models, the BEA tally of motor vehicle output in dollar terms was only down marginally.

As an example, Ford was able to maintain output of its most profitable vehicle, the F-150 pickup truck, through most of March by channeling its supply of chips to that model.  However, the shortage has begun to bite more sharply lately, as production of the F-150 was cut in April and is scheduled to remain below normal until mid-May.  GM has similarly managed to maintain its production of big pickup trucks and SUVS up to now by funneling its supply of chips in that direction.

Manufacturers have been revising down their assembly schedules on a month-to-month basis, so that the latest schedules still officially call for a bounceback in output beginning in May.  However, this seems unlikely.  Ford’s CEO said this week that his company expects the chip shortage to “get worse and bottom out” during the current quarter, which would mean that any recovery in output is unlikely before the third quarter.

Stellar demand

The timing of the production snags is especially unfortunate as households are flush and ready to spend.  Two rounds of rebate checks in early 2021 have only added to consumers’ wherewithal and desire to buy cars and trucks, among other goods and services.  So far, dealers have been able to fulfill their demand, as unit auto sales surprisingly jumped in March despite lean dealer inventories and industry reports point to another solid month in April.  Likewise, firms are looking to replenish and upgrade their fleets after a sharp dip in business investment in vehicles last spring and summer.  In particular, rental car companies are likely going to be in the market to restore their fleets now that travel is picking up, after being forced to sell off much of their stock to survive the pandemic.

In any case, in the first quarter, consumer spending on new motor vehicles surged to a level more than 20% higher than any reading during the prior expansion.  In addition, business investment in vehicles continued to recover, though there could be much more to go, as the level of outlays remained well below pre-pandemic levels.

Draining inventories

With production off slightly and final demand up sharply, the arithmetic points to one clear outcome: inventories must have plunged.  Aside from the second quarter of last year, when manufacturers were forced to shut down their entire operations for almost two months, inventories posted by far the largest reduction over the past decade (Exhibit 1).

Exhibit 1: Quarterly change in motor vehicle inventories

Source: BEA.

In fact, the BEA recorded a $73 billion annualized drop in new motor vehicle inventories, accounting for more than 80% of the $90 billion decline in overall inventories in nominal terms for the quarter.  The contraction in new motor vehicle inventories represented a drag of about 1.3 percentage points on GDP growth.

What next?

As with so many other sectors of the economy, the next shoe to drop is likely to be a rise in prices. Up to now, shoppers have largely been forced to take a vehicle that has a different color or option package than they wanted.  Or perhaps to put down a deposit and wait for a vehicle to be delivered to the dealer soon.  However, as with housing and a number of other manufacturing industries, if the feeding frenzy continues, inventories will dwindle further, and dealers are likely to respond by raising prices to better ration their remaining stock.  Furthermore, used vehicle prices, the obvious substitute for a scarce new vehicle, have been registering surging prices at wholesale auctions since the turn of the year and are likely to surge at the retail level over the next several months.

This is one high-profile example of what Chair Powell has labeled transitory forces likely to push inflation higher for a brief period.  It remains to be seen how much longer the dislocations in the motor vehicle sector will persist and how bad they will get, but they are sure to continue to have a significant impact on the broad economic data, including GDP and inflation in the current quarter.

admin
john.killian@santander.us
1 (646) 776-7714

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.

The Library

Search Articles