North American auto production begins to rebound: Scotiabank

Stronger-than-expected U.S. motor vehicle sales in recent months have reduced inventories on dealer lots, setting the stage for a rebound in U.S. auto production from the summer doldrums, a new report from Scotiabank says. As a result, output gains will become more widespread across North America in 2018, driven by the introduction of new models and a rebound in heavy-truck assemblies due to the recent surge in new orders.

According to Scotiabank’s latest Global Auto Report, the growth in global car sales temporarily softened in October 2017 from the quickening pace of the summer. “In October, global volumes edged up only 2% year-over-year (y/y), the smallest gain in four months,” Scotiabank said. “Much of the slowdown reflects a temporary 0.2% y/y decline in Asia, which is likely to be reversed in coming months, as most macroeconomic indicators continue to strengthen across the region.” The weakness was concentrated in South Korea, the report said, and reflects a distortion due to the timing of the mid-Autumn Festival Holiday which fell in early-October this year, but was in September in 2016. “As a result, auto sales in South Korea slumped 11% below a year earlier, but combined September/October purchases actually advanced 3.5% y/y,” Scotiabank said. “Sales continue to strengthen across Western Europe, rising 4.6% y/y in October buoyed by improving economic growth.”

Five countries reported double-digit sales gains in October, Scotiabank said, up from an average of four nations per month since April. “Purchases also continue to gain momentum in both Eastern Europe and South America, advancing y/y in October by 17% and 32% respectively,” it said. “In fact, the gain in South America is the largest y/y increase since April 2013, when economic growth in the region was in excess of 4% y/y.”

More recent data for November point to some softening across North America from the record high of recent months. “In Canada, purchases declined below a year earlier for the first time since April, putting an end to the six consecutive monthly records,” the report said. “However, November sales remained above an annualized 2 million units for the ninth consecutive month. Light trucks continue to be the source of strength, with nearly all manufacturers reporting year-over-year sales gains.” U.S. car and light truck sales remained above expectations in November, Scotiabank said, but eased from the record-setting pace of the previous two months. “The solid results since September ensure that full-year 2017 purchases will exceed 17 million units for the third consecutive year,” the report said. “We expect this trend to continue in 2018, supported by a strong economy and ongoing replacement demand.”

Unfortunately, the U.S. and Canadian auto industries have not participated in the broadly-based industrial recovery that has taken hold across both developed and developing markets over the past year, Scotiabank said. “While overall U.S. industrial activity has jumped 1.7% y/y in the first ten months of 2017, the best performance since 2014, U.S. auto production has slumped 8% y/y from January through October and is set to post its first annual decline since the global economic downturn of 2008–09,” the report said. “A similar fall-off is occurring in Canada, due to the closure of an assembly plant in Oshawa, Ontario and a prolonged strike at another facility.”

However, the advance in U.S. sales since September to the highest level since 2005 has reduced inventories below a year earlier for the first time in two years, setting the stage for higher assemblies. “In fact, the auto industry’s latest production schedule calls for U.S. motor vehicle assemblies to climb to an annualized 11.2 million units in the final months of 2017, up from only 10.5 million between July and September,” Scotiabank said. “We estimate that this rebound will add an annualized 0.6 percentage points to U.S. GDP growth in the final months of 2017, the largest contribution from the auto sector since late 2013.”

Auto production should advance further next year, Scotiabank said, buoyed by the introduction of new vehicles as Volkswagen/Audi, Kia, and Subaru all offer new 2018 models built in North America. “We estimate that these new models will add more than 220,000 units to North American vehicle output next year, accounting for more than half of the expected increase in auto production across the continent in 2018,” the report said. “However, the largest percentage increase in North American vehicle output is coming from heavy trucks, as stronger U.S. economic activity, rising traffic, and stronger business and consumer confidence have recently led to a surge in heavy-truck orders.” So far this year, heavy-truck orders have spiked 72% y/y across North America, Scotiabank said, roughly four times the increase in heavy-truck output. “To meet the latest surge in demand, heavy-truck manufacturers are planning to boost production 50% y/y in the final months of 2017,” it said. “A further 15–20% output gain is likely in 2018, which would lift annual 2018 heavy-truck production to the highest level in three years.”

Vehicle production is also rebounding outside of North America, Scotiabank said. “For example, new orders for vehicles built in Germany and Spain have increased more than 6% y/y in the 12-months through September, but output has edged lower so far this year, setting the stage for rising assemblies in 2018,” the report said. “Meanwhile, strengthening demand combined with multi-year low inventories in China point to higher production in Asia.” However, South America is leading the revival in vehicle output, and will continue to post the fastest growth in assemblies in 2018, Scotiabank said. “Vehicle production in the region has jumped more than 20% this year and a further double-digit increase is likely in 2018, as demand continues to recover from the sharp downturn during 2014–2016.”