As any market veteran can tell you, those on the sell-side are the second-to-last to concede to a slowdown in economic activity. It’s unseemly to make negative calls when a firm’s main objective is keeping its clients fully invested in risky assets; the two aims naturally conflict.
Hence the surprise when Bank of America Merrill Lynch said autos are headed for a “decisive downturn” that will trough in 2021 at around a 13-million-unit annualized rate, down from last year’s blistering record 17.6 million. A week earlier, Morgan Stanley, whose numbers are not quite as grim, also reduced its sales forecast, recognizing that the best days of the cycle have come and gone.
The U.S. economy is consumption-centric. Growth in the current recovery has centered on three industries that have fed through to consumption in its various forms -- autos, energy and financial services. There’s something almost poetic in finance’s re-emergence, especially for those on Wall Street who’ve profited smartly from unprecedented levels of deal flow.
Have a debt problem? Solve it with more debt. And why not? This system has worked for generations; insatiable demand for debt is why interest rates have staged their historic decline.
Debt lit the fire that ignited the shale revolution. Debt put a floor under and then helped commercial real estate reach for the skies. Debt kept dying retailers alive. And debt made easier back-to-back years of record car sales.
The question so many bullish economists must answer is what debt can do for the economy in the future.
Much to the Saudis’ dismay, the energy industry is as lean and mean as it’s ever been; operating efficiency gains have been magnificent in a do-or-die environment. Energy is growth neutral going forward.
Retailers are now choking on their debt as profit margins implode. Since February, retail payrolls have contracted by 81,000. There are 4.5 million salespersons and 868,000 grocery store cashiers. Draw all the positive conclusions for lower grocery tabs you like as a result of the expedited consolidation catalyzed by the marriage of Amazon and Whole Foods. There’s no reason to think retail will cease to be a drag on growth going forward.
Restaurants now employ 10.6 million people. As furious as the retail righting has been, comeuppance could be even swifter for big-footprint restaurant chains. Nature dictates that many eateries will suffer as malls die. But more importantly, executives are being jolted by the reality that they had better follow their brick-and-mortar colleagues down the path of preemptive paring of locations that will soon be cash-flow negative and/or losing money. As far as this mega-sector pertains to future economic growth, it’s safe to say clouds are forming.
As for autos, the bad news was baked in long ago as record lease sales laid the groundwork, according to Bank of America Merrill Lynch.