Do Car Sales Indicate An Approaching Recession?

If sales by new-car dealers are down by two percent or more over 12 months, compared to the 12 previous months and adjusted for inflation, then a recession is either underway or set to begin within a few months. The figure stood at minus 2.4 percent when June 2006 sales figures were released by the Census Bureau. The indicator has correctly called five recessions since 1968, and has never warned of a recession that did not occur, according to an analysis by The New York Times.

A key reason for the concern is the real estate "bubble." Residential real estate assets accounted for more than two-thirds of recent GDP growth, not wages. Now that the real estate boom is coming to an end, or at least appears to be cooling substantially, the potential exists for serious consequences to the U.S. economy.

Consumers understandably tend to look for cheaper alternatives to new cars when the economy begins to show weakness, and right now consumers are faced with historically high fuel prices, a real estate market that has leveled off and declining in some geographic areas, and the gradually declining value of the U.S. dollar. As a result, the price is going up on imported goods which are no longer produced in the United States.

The Federal Reserve masterfully engineered low interest rates which stimulated not only business activity, but real estate development, home re-financing and home equity loans. In the past several years, the consumer has been taking money out of his house just to keep going. Fistfuls of money. Truckloads of it. Over the last two years alone, $1.352 trillion of equity has been extracted - an amount equal to about 10% of annual GDP.

The consumption expenditures that resulted powered much of the economy in recent years. The spending binge, which couldn’t last, is coming to an end. While consumer debt levels have become staggering, Congress still is in no mood to stop spending. Real wage increases have been modest and don’t begin to offset rising employee “benefit” costs, inflation, and higher taxes that were instituted by state governments immediately after the Bush Administration's federal tax cuts.

Aggravating the situation is the growing world demand for petroleum products, political unrest in the Middle East and the Islamic Wars. Congressional liberals have refused for decades to develop any new energy sources or permit construction of nuclear power plants or refineries. If the United States were to experience a national emergency and attempted to make up for lost time and opportunities, it would still take ten years to bring any refinery or nuclear facility into production, assuming environmentalists, state and federal courts, and Congress would acquiesce. As a result, consumers will continue to be pinched harder by higher (and still climbing) fuel prices and taxes, and the slumping real estate market is making it more difficult to extract any asset equity to purchase a vehicle (or other durable goods).

Decide for yourself if you think the United States is on the verge of a recession. In any event, it would be wise to begin to eliminate any accumulated household debt as quickly as possible. You do not want to run out of money before your bills are paid (if you are young), and you definitely do not want to run out of money before you die (if you are enjoying the final years of a good life).

Remember, the severity of any economic downturn cannot be predicted.

Red State Patriot

Posted August 22, 2006 04:27 PM
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