Auto sales: Can record incentives revive auto industry fortunes?
Monthly auto sales
Light vehicle auto sales for March will be released on Tuesday, April 1. The light vehicle annualized selling pace came in at 15.3 million in February, practically at the same levels as January’s 15.2 million and December’s 15.3 million. Sales were also unchanged from last February’s levels.
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Why are monthly auto sales an important economic release?
Vehicle sales are usually considered a bellwether for consumer sentiment and they can also indicate the start or end of business cycles. An increase in consumer spending on discretionary big-ticket items like cars means the economy is beginning to pick up pace. As consumption makes up over two-thirds of the U.S. economy, an increase in auto sales heralds overall economic growth.
This reading includes both domestic vehicles and imports. Domestic sales comprise vehicles produced in the U.S., Canada, and Mexico. Imports are U.S. sales of vehicles manufactured outside the countries mentioned above.
Year-to-date readings aren’t spectacular for GM and Ford
Both Ford (F) and General Motors (GM) reported lower monthly sales in February, with cars and light vehicles numbers dropping 6.7% for Ford (F) and 6.1% for General Motors on a year-to-date basis compared to 2013 (www.motorintelligence.com). Unusually cold weather was responsible for the poor vehicle numbers recorded this year. Depressed auto sales in the last two months have forced automakers to up their incentives. TrueCar estimated that incentives averaged $3,719 for General Motors (GM) and $3,260 for Ford (F)—probably the highest since 2010. Industry observers are keenly watching for any signs of a bounce in auto sales, which were pretty decent in 2013, reaching levels seen in 2007.
If vehicle sales increase in March, this will add to the list of indicators implying the economy is expanding. An ETF with exposure to the auto industry is the First Trust NASDAQ Global Auto Index Fund (CARZ), which tracks the NASDAQ OMX Global Auto Index—a modified market cap–weighted index tracking the performance of publicly listed and highly liquid auto companies.
An increase in the manufacturing PMI will also imply the economy is recovering, and, other things remaining constant, interest rates could increase faster than expected. The Fed at its recent FOMC meeting has indicated that it will raise the base rate sometime between Q2 and Q4 2015. If economic data releases indicate a faster-than-expected recovery, this would push the rate increase nearer. One way investors can benefit from higher rates is by investing in floating-rate fixed income ETFs like the VanEck Vectors Investment Grade Floating Rate ETF (FLTR) and the SPDR Barclays Cap Investment Grade Floating Rate ETF (FLRN). As interest rates rise, these ETFs benefit, as their interest rates aren’t fixed but benchmarked to a reference rate and reset at periodic intervals.
To find out about a manufacturing survey that has important implications for companies like Union Pacific (UNP), read on to Part 6 of this series.