.png){kind=small}
Distress in the auto business has kicked
way up over the last couple months
another cyclical indication to add to
broader concerns about the longrun
health of the global economy the latest
comes from the ism and it was bad for
December second lowest since 2020 new
orders that are crashing shipments that
are cratering the entire industry is
only now being forced to come to grips
with far more overc capacity than had
been previously hoped and it's a
microcosm of the entire economy how
there really was no recovery from the
pandemic car makers all around the world
had expected there would be and even a
robust one and them finding out
differently has only been delayed by the
supply shock itself Car Sales were still
relatively decent through last year and
for some even into this year stellantis
stock price for example that was at a
record high as late as March but it's
been all downhill ever since then
another signal that has shown a major
shift in the global economy from around
March and April but now the damage is
starting to spread out all over the
world Europe's manufacturers they're a
total mess there are layoffs and even
way too many workers for the amount of
production in the United States American
demand for Japanese cars has absolutely
plunged so much that Nissan has gone
begging to Honda for a Hail Mary merger
to save it from possibly going
completely broke or at least more broke
than it already is and this isn't about
electrification in the so-called slow
adoption of electric vehicles all that's
just a euphemism for consumers don't
want electric vehicles and even if they
did they can't afford them or any other
cars right now as Volkswagen CEO
admitted a couple months ago quote the
market is simply no longer there that's
also true for the entire global system
and it's alleged recovery overc capacity
in the auto business is just a symbol of
how the economy is simp simply no longer
there as a consequence there's going to
be more layoffs and autos and elsewhere
Central Bankers as I said this weekend
ending this year in a state of panic not
that their rate cuts are going to be
able to fix this these are cyclical as
well as structural warnings that we're
getting from the auto business a
representation of the underlying
fundamentals which really are that we
never recovered from the 2020 Supply
shock that's what's really going on here
that businesses were expect in a
recovery because everyone said there
would be businesses and Autos more than
anywhere it was only the imbalance
between supply and demand during 2020
and 2021 demand came back faster than
Supply was able to service and because
of that prices were the only way for
that to adjust so prices zoomed ahead
and it made it look like the economy was
red hot it looked like inflation to many
people when it was really just that
simple economic imbalance but company
and governments and people all over the
world began to plan and act as if that
was going to be a permanent plateau of
prosperity it wasn't and that illusion
became started to become revealed in
2022 heading into 2023 but for the auto
business which this illusion was bigger
than most prices zoomed way ahead
because of the inability for for
automakers to Source supplies like chips
for example prices zoomed way ahead even
though they weren't making nearly as
many units as they had been before the
pandemic so they they hired workers and
they brought back facilities that
ultimately they would not need because
they are expecting over time that volume
would go back up and come back up and
recover to where prices and nominal
levels had been that's what we're
finding out all over the world is that
it didn't work out that
way so now the auto business like a
whole lot of businesses around the world
is left with a tremendous amount of
overcapacity we've flipped everything
around where there was too much demand
and even wasn't that that much demand
there was too much demand for the
inability of the system to supply it
back a couple years ago now there's too
much Supply because everyone is
expecting that demand would be
maintained or at least recover in full
when we see in the labor market the US
in particular it never even came close
we're millions and millions of jobs
short where we should have been had
there been no p no
pandemic so with that amount of
overcapacity the industry the Auto
industry as well as the general global
economy they have to adjust to those
fundamentals there is a misalignment
here too much Supply not enough demand
which means cutting back on Supply and
that's what the ism said today about
December in the United States at least
that region of the US economy the ism
Chicago or the business ometer there
that went plunged to
36.9 from
40.2 in November so 36.9 here in
December when it been about 46.6 back in
September this December reading is the
the lowest since May and the second
lowest since 2020 the new orders index
fell 13 a 12 points to its second lowest
since May of 2020 and for the first time
since 2020 more than half of the
respondents in the survey said they're
getting fewer new orders so this is more
widespread weakness than we've seen at
any point since 2020 and ISM Chicago was
always sort of a loose proxy for the
auto business in the United States so
when that was doing well or at least not
as poorly over the last several years
that suggests that maybe the auto
business could come back from its
pandemic Lo maybe there was a way for a
slow drawn out recovery that's one thing
that businesses and Employers in
particular have been holding out hop for
even though there's this massive
imbalance between actual demand and
their ability to supply it too much too
much Supply not enough demand over
capacity holding out hope that demand
would continue to grind higher and come
back to the point that they wouldn't
need to cut back on Supply and it
wouldn't need to come back on capacity
by closing factories and laying off
workers but the auto business is
starting to come to grips with the fact
that it's not going to end up that way
so welcome back to the US in just a
minute but right now Europe is Ground
Zero for this realignment process which
is really nothing more than yeah I'll
use the term recession that's what a
recession is when you have too much
Supply overc capacity and the entire
economy is forced to adjust back to
where it has a more stable equilibrium
equilibrium is not the right term either
but Europe as Volkswagen CEO had said a
couple months ago the market is simply
no longer there they're basically coming
to terms with the fact that there is no
recovery in auto
they're making a lot less autos and
that's not going to change even if the
price went way up on individual cars
they don't sell as many cars which means
they don't need to make as many cars
which means they don't need as many
workers nor factories and so Volkswagen
is basically at the absolute middle of
this entire misalignment in the process
to readjust meaning they have to cut
back on capacity because there's just no
way for them there's no way they need
all everything that they have they don't
need as many factories or workers so
just recently Europe's top car breaker
Volkswagen agreed to a deal with unions
on December 20th to cut 35,000 jobs and
to reduce Factory output by almost a
quarter in Germany though there are no
immediate plant closures or layoffs
those are going to come eventually but
Volkswagen did say earlier in December
that its Audi plant in Brussels will
cease production by February 28th after
the company found no alternatives to
that closure and Volkswagen is just
where it's most prevalent right now but
it's just just the beginning just the
tip of the
iceberg stellantis is another one on
November 26 it announced plants to shut
its voxhall van Factory in Luton England
putting more than a thousand jobs at
risk and has repeatedly halted assembly
operations at its main plant in Italy's
Mira fiori due to low demand particular
for electric version of the Fiat 500 and
it's not just car makers obviously it's
going to spill over into down the supply
chain into Auto Parts makers
manufacturers shippers retailers
wholesalers the the entire Gambit BOS
who's the world's biggest Auto Parts
Supplier announced plans to cut 5,500
jobs by
2032 in its cross domain Computer
Solutions and steering divisions mostly
at German sites and will reduce work
hours for some employees that's what it
said last month even though that's a
longer term layoff project they're
certainly not going to be hiring over
the next little while and those layoffs
are going to going to hurt and happen
along the way Ford us automaker Ford on
November 20th said it was going to cut
4,000 jobs primarily in Germany and
Britain which represented
14% of its entire Workforce and in a
statement the company said the
transformation is particularly intense
in Europe where automakers face
significant competitive and economic
headwinds economic headwinds while also
tackling a misalignment between carbon
dioxide regulations and consumer demand
for electrified Vehicles so governments
have been pushing EVS consumers don't
really want them automakers are forced
to make investments and then the rest of
the car business which is supposed to
support this trans transition isn't
doing so because of overcapacity not
just over capacity in EVS over capacity
everywhere and not just in
Europe before we get to the US and
especially Japan what's going on with
Honda and Nissan do I want to remind you
that you are down University we're still
having our after Christmas New Year sale
for the next couple days you only got a
couple days left and here's your chance
to go deep into the money and macro
world where we talk about the US dollar
especially recently but also the labor
market what's really happening the
curves what's happening in us treasuries
we go deep into all of these topics in
our Deep dive analysis and as part of
that after Christmas New Year sale
there's the best deal we have on the
Deep dive analysis where you get that
you get EUR University's AI you get a
membership in the daily briefing but
there's information on all everything
that we're offering for the Christmas
sale at our website Euro dollar.
University so shifting gears from the
really pathetic state of the European
business to the United States there have
been layoffs here and as we've seen in
government data including the BLS
establishment survey layoffs the there's
been a total reverse in the behavior of
employment in the auto business in the
United States too to start with GM has
laid off about 2,000 workers in two
rounds starting in August and and again
in November the company cited again cost
cutting and changing market conditions
changing market conditions being
realizing overc capacity stantis not
only are they struggling overseas
they've they've initiated plans to cut
nearly 4,000 factory jobs here in the
United States and those Factory Cuts
have become a contentious uh issue with
the UAW the big Union in the US for Auto
Workers who have accused the company of
violating the recent contract by
removing product commitments especially
where it came to the Jeep Cherokee and
have threatened to strike over the
allegations even though St santis itself
maintains that it has the contractual
right to do this based on market
conditions and there's really not an
argument there because the market
conditions are not just facing
stellantis they're facing everyone so
it's causing problems labor Strife overc
capacity laying off workers no not
investing in new fac you don't need need
new facilities so there's it's a broader
economic problem than just not being
able to sell a few more cars or not
being able to sell as many cars as they
were doing a couple years ago before the
pandemic even Tesla earlier this year
around April announced that they were
cutting about 10% of its Workforce and
they ended up cutting around 15,000
workers and behind all of this like I
said before no one is going to be hiring
and the worst part of all of that is is
as these layoffs happen and these good
paying jobs disappear there is no place
for these Auto Workers to go with the
lack of hiring lack of
opportunities basically it's 26 weeks of
unemployment insurance Aid and then then
nothing so this is the worst part and it
it adds into all of the recession and
cyclical problems that we're
experiencing Europe the US and even
Japan even going by the US establishment
survey the number of Auto Workers
according to the BLS were there were
1.08 million as of July 2024 even though
the Federal Reserve and its industrial
production estimates showed that
domestic motor vehicle assemblies
totaled well was 9.2 million season
adjust an annual rate in July same month
but that had been the six-month average
up until up until the latest data which
is November around 10.3 million so 10.3
million domestic motor vehicle
assemblies for about 1.08 million
workers but that compared to just 1.01
million workers in February of 2019 at
the last cycle Peak back when the
six-month average for motor vehicle
assemblies was
11.4 million so you can see what
happened here even in the United States
there were 7 7% more workers in July
compared to February of 2019 even though
they were producing 10% fewer units on
average making fewer cars with more
workers means that's fine as long as the
price illusion is happening and nominal
prices are still growing which means
that revenues are still growing but as
soon as the nominals part of it slows
down managers look at the amount of
production that they're actually
producing 10% fewer cars and says and
they say why do we have 7% more workers
well they don't have 7% more workers for
very long in many ways Japan has it much
worse because the auto business in Japan
is not as big as it used to be certainly
used to dominate Japan and Inc but it's
still an important part of the Japanese
economy and Nissan is like stellantis or
Volkswagen the really the most visibly
troubled company there is they already
cut announced that they were cutting
9,000 jobs last month and said they were
going to reduce manufacturing output by
about
20% so one5 of their entire Global
Production they said we're going to cut
it back because of overc capacity as a a
result Nissan has been looking for
solutions to what are really big
problems and just recently suddenly
there was an announcement that Honda and
Nissan along with Mitsubishi to an
extent were exploring ways in which they
could possibly combine and even as that
was being announced Honda's CEO
reportedly had enormous difficulties in
saying in in articulating why Honda
would even want to get involved with
Nissan Honda CEO just had a pretty
awkward press moment related to its
potential merger with Nissan when asked
why Nissan would make a good business
partner for the midsized automaker Honda
CEO struggled to find the right words
before blurting out something that
brought laughter to a room full of
journalists that's a difficult one he
said and the reason why they're merging
is likely because of government pressure
the article continues rumors haveit that
Japan's Ministry of economy trade and
Industry helped to influence the deal to
avoid Fox con's takeover of Nissan after
meti which is the ministry end fored the
merger assuming the merger does go
through between Honda and Nissan for
basically non-economic reasons what that
will mean is Nissan's going to get it in
other words there's going to have to be
a massive amount of cost savings because
of all the redundancies that would be
created really this is just nothing more
than a tactic to eliminate Nissan and to
a fair amount Honda's overc
capacity one of the reasons what's
brought urgency to all of these things
things is that not only overc capacity
but demand that wasn't there to begin
with there wasn't a recovery again the
cyclical part of this demand is falling
off from Japan's perspective and the
most recent trade data that they just
report as well as industrial production
and the production of Motor Vehicles
show pretty Grim
results according to Japan's industrial
production after the Toyota Scandal dutu
earlier in January production that sank
after they they closed down everything
with dutu but it never came back in
Japan anyway so average output in the
latter 6 months of
2024 is down 8% compared to this the
final six months of 2023 so output went
down and never came back even after the
Scandal was over with and even after d
Hutu production was brought back online
one of the reasons is that exports just
aren't there export Global demand for
Japanese Autos despite the fact the Yen
has been much weaker this this year
exports to the world of Motor Vehicles
from Japan are down 3.8% year-over-year
and that's unit volume in terms of
values down 5.2% year-over-year these
are the month of November and Export
specifically to the United States down
16.9% in unit sales year-over-year
16.9% a huge drop in demand for Japanese
cars massive overcapacity because the
industry never recovered on top of now
cyclical downturn which just adds more
misery to a miserable
situation it's not just one thing or
another it's it's all of it it's
overcapacity because of lack of
recovery everyone was expecting the
economy to come back after the last
couple years because it looked like it
was going to but then it took a wrong
turn in 2022 and slowly over time
everyone in it but most of all
automakers are realizing they have way
too much productive capacity it for the
limited recovery from 2020 and
2021 that much overc capacity means
recessionary processes recessionary
processes for individual automakers as
individual businesses for Industries and
the global economy as a
whole quite simply if you make less
stuff you don't need as many workers to
make less stuff and if you were hiring
expecting to make more stuff and then
that never happened
you have to get rid of the workers that
you that you planned on using when you
were thinking that the economy was
actually recovering so the auto business
is still going through this misalignment
transition not to electric vehicles but
to the fact that as Volkswagen CEO said
the market is simply no longer there and
it is as I said in the introduction a
microcosm of the entire global system
the economy is simply no longer there
everything that we just went over
explains why the US dollar was this
year's big surprise and went over that