Consumer Discretionary / Industrials

Henry Kwon

Thematic (Sector/Industry)

United states Automobiles / Thematic (Sector/Industry)

August SAAR came in at 16.7m units, down by 0.3% sequentially but up by 0.9% YoY.  There are several factors that make apples to apples comparison between August '18 and August '17 difficult: the first day of labor day weekend this year fell on the last day of August unlike in 2017, and Hurricane Harvey hit the U.S. in August.Having said this, there are several reasons why we continue to believe that there is downside risk to U.S. SAAR for the remainder of 2018 and further in 2019:<ul>
<li>
Car buyer sentiment on U Michigan's CSI Index on Vehicle Buying Conditions has been deteriorating, with high vehicle price and economic uncertainties as key reasons why consumers believe vehicle buying conditions will be bad over the next 12 months.  Historically, the CSI index has tended to lead SAAR by 1-2 quarters.</li>
<li>
The Pending Home Sales Index (National Association of Realtors) have also been showing declining transaction volumes for the third straight quarter if we take July's Index to extrapolate 3Q.  We would expect to see slowing rate of growth in housing price in the coming quarters if history is any indication of where housing prices are headed.</li>
<li>The FRB's senior loan officer surveys indicate that there is still a willingness to lend, but with expected further increase in the Fed Funds Rate through the end of 2018 at least, we would expect credit availability to be a neutral impact on monthly SAAR through the end of this calendar year.</li>
</ul>What these economic factors suggest to us very strongly is that if anything, car buyers should be front loading their replacement vehicle purchases especially given expectations for higher price tag (the rising Average Transaction Price that OEMs proudly point to) and higher cost of ownership (higher fuel costs &amp; debt servicing costs).  <div class="content-highlight">We have been expecting an average of 16.7m unit SAAR range in 3Q (see <a href="https://www.smartkarma.com/insights/global-auto-demand-tracker-u-s-saar-looks-set-to-fall-in-2h18" target="_blank" data-smartkarma-citation="insights:21460">Global Auto Demand Tracker: U.S. SAAR Looks Set to Fall in 2H18</a>) based on our observations of 4 macro factors and so far into the quarter the sub-17m unit SAAR is not surprising.  Our observations also suggest that buying condition expectations are conducive to buying now versus delaying purchase till later, which also would suggest that SAAR may see further weakness in the quarters that lie ahead.</div>Short term winners in the U.S. market are D3 with dominance in the light truck segments with full pricing power.  This may not prove to be a lasting advantage not because of Asian brand challenges but because of a deteriorating macro environment for new vehicle demand in the coming quarters.  Long term trend demand in the U.S. stands at 16.0m units, but based on our observations, it may not be unreasonable to expect SAAR to dip below 16.0m units in 1H19.

August SAAR came in at 16.7m units, down by 0.3% sequentially but up by 0.9% YoY.  There are several factors that make apples to apples comparison between August '18 and August '17 difficult: the first day of labor day weekend this year fell on the last day of August unlike in 2017, and Hurricane Harvey hit the U.S. in August.Having said this, there are several reasons why we continue to believe that there is downside risk to U.S. SAAR for the remainder of 2018 and further in 2019:

Car buyer sentiment on U Michigan's CSI Index on Vehicle Buying Conditions has been deteriorating, with high vehicle price and economic uncertainties as key reasons why consumers believe vehicle buying conditions will be bad over the next 12 months.  Historically, the CSI index has tended to lead SAAR by 1-2 quarters.

The Pending Home Sales Index (National Association of Realtors) have also been showing declining transaction volumes for the third straight quarter if we take July's Index to extrapolate 3Q.  We would expect to see slowing rate of growth in housing price in the coming quarters if history is any indication of where housing prices are headed.
The FRB's senior loan officer surveys indicate that there is still a willingness to lend, but with expected further increase in the Fed Funds Rate through the end of 2018 at least, we would expect credit availability to be a neutral impact on monthly SAAR through the end of this calendar year.
What these economic factors suggest to us very strongly is that if anything, car buyers should be front loading their replacement vehicle purchases especially given expectations for higher price tag (the rising Average Transaction Price that OEMs proudly point to) and higher cost of ownership (higher fuel costs &amp; debt servicing costs).  We have been expecting an average of 16.7m unit SAAR range in 3Q (see Global Auto Demand Tracker: U.S. SAAR Looks Set to Fall in 2H18) based on our observations of 4 macro factors and so far into the quarter the sub-17m unit SAAR is not surprising.  Our observations also suggest that buying condition expectations are conducive to buying now versus delaying purchase till later, which also would suggest that SAAR may see further weakness in the quarters that lie ahead.Short term winners in the U.S. market are D3 with dominance in the light truck segments with full pricing power.  This may not prove to be a lasting advantage not because of Asian brand challenges but because of a deteriorating macro environment for new vehicle demand in the coming quarters.  Long term trend demand in the U.S. stands at 16.0m units, but based on our observations, it may not be unreasonable to expect SAAR to dip below 16.0m units in 1H19.

August US Auto Demand: 16.7m Unit SAAR Not Surprising...but Shouldn't Buyers Be Front Loading Now?