Hopes are running high that potential interest rate cuts by the Federal Reserve will support the auto and housing sectors, two parts of the economy that are sensitive to borrowing costs.
The risk, though, is rising that any relief won’t come until after these critical leaders of the current economic cycle have already fallen into contraction.
Headed into the promotion-heavy Memorial Day weekend, analysts spoke of automakers finally succumbing to the need to spur car sales with deep discounts. What’s remarkable is the line manufacturers have been able to hold off on incentives, which fell for 11 straight months, according to TrueCar Inc.’s ALG data and analytics unit. While shareholders have applauded the safeguarding of profit margins as inventories piled up, the pressure to match supply and demand has given way to three months - and counting - of production cuts.
The rapid rate at which auto layoffs are rising suggest a spillover into the broader economy. Challenger, Gray and Christmas notes that the almost 20,000 announced layoffs in the first four months of the year were up 207% over the same period of 2018. “Job cuts in this sector are likely to continue, especially with the implementation of additional tariffs on Chinese goods,” Andrew Challenger, the firm’s vice president, wrote in a report. “Automakers and suppliers will feel the pressure, which may lead to more cuts.”
It’s one thing to have a continuation of losses in the beleaguered retail sector, but the loss of high-paying jobs in both autos and industrials threaten to further hobble the housing market.
Connecting autos to housing isn’t a stretch. Fed officials have maintained that the recent slowdown in inflation would be “transitory” in nature. History, however, reminds us that one form of inflation is anything but passing once in nature. Home prices largely held their gains after recovering in the wake of the last recession. Recently, though, there’s been a downtick in the rate of those gains. Home price appreciation fell to an 11-month low in April, based on a three-month moving average of purchases using Federal Housing Finance Agency data.
The burning question now is whether slowing home price gains will turn into outright declines? Perhaps we should ask the powers that be in Detroit. The last time layoffs over the prior 12 months were north of 50,000 was August 2010 as the bailed-out auto industry emerged from the recession.
The warnings from Challenger preceded the threatened tariffs on Mexico, where the U.S. sources 37% of auto parts. A separate report from Deutsche Bank projects an additional 18% production cut in the worst case should tariffs on Mexican imports ratchet up to 25% on Oct. 1, as the Trump administration has threatened.
Even if the tariffs never come to pass, retail sales of vehicles suggest manufacturers have more cuts to make to balance supply and demand. According to Cox Automotive Manager of Economic and Industry Insights Zo Rahim, retail vehicle sales were negative for all of 2018 and have yet to improve. “Through May, retail sales are down 4% over last year and there is little evidence that demand is strengthening. Fleet sales have been supporting overall new vehicle sales but haven’t been able to prop up sales year-to-date.”
One thing is certain. If confidence tied to the trade war and rising layoffs in high paying industries continues to wane, the disconnect between home buyers and sellers will be reconciled as sellers capitulate. The latest University of Michigan consumer confidence report noted that its index tracking those who think it’s a good time to buy a home has fallen by a hefty eight points in the past two months even as mortgage rates have dropped. Meanwhile, those who perceive it’s a good time to sell is just one-point shy of the highest level in data back to 1992.
Setting aside the barrage of depressants, many home buyers know prices follow sales volumes. Sales of existing homes have fallen for 14 consecutive months and are 4.4% lower than they were in April 2018. This helps explain the stutter in the FHFA data as well as that of the Case-Shiller Home Index, which shows that at 2.7% through March, home price appreciation over the prior 12 months is at the lowest since August 2012.
In its latest April Mortgage Monitor, Black Knight noted that March typically marks the strongest month of the year for home price gains. But this March bucked the trend, with prices rising just 1% and marking 13 consecutive months of decelerating gains. The annual rate of appreciation has slipped to 3.8%, the first instance of increases falling below their 25-year average of 3.9% since 2012. Some 85 of the 100 major markets tracked by Black Knight have seen a decelerating pace of home gains over the past 12 months.
Into this weakening environment, millions of baby boomers will endeavor to downsize in coming years. With luck, the additions to existing inventories will be controlled. The main determinant will be whether the stock market’s gains don’t evaporate too much. Millions of boomers don’t have the same latitude to remain in the workforce as was the case a decade ago when their retirement accounts were last stress-tested.
As rare as the housing crisis was in modern U.S history, the strength of its rebound in the current recovery implies national home price declines are once again a possibility. Should an elevation in the trade war manifest, the accelerated pace of auto layoffs promises to push home prices into the red. In that case, Fed Chair Jerome Powell will have precious little ammunition with which to combat issues that will make him yearn for the good old days of inflation that is fleetingly low.
Danielle DiMartino Booth, a former adviser to the president of the Dallas Fed, is the author of 'Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America,' and founder of Quill Intelligence.
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