First, this from CNN Money on September 1, 2010 (emphasis added):
The nation’s top automakers reported disappointing sales Wednesday, resulting in the worst August for industry wide auto sales in 27 years.
According to sales tracker Autodata, U.S. new vehicle sales fell just short of 1 million vehicles, a drop of 21% from a year ago, which included Cash for Clunkers. That federal program created a sugar rush of sales by dangling an incentive of up to $4,500 in cash for buyers who traded in older gas guzzlers for more efficient models.
Industry sales also fell 5% from July levels. August sales typically outpace July, as deals become available on older models ahead of the fall introduction of new model year cars. August sales would equate to an annual sales pace of about 11.5 million vehicles.
“Car buying is far from repaired, and consumers hesitate before they make a big ticket purchase,” said Jesse Toprak, an analyst with the auto pricing Web site Truecar.com. “It shows that the recovery is going to be much slower and more painful than expected.”
This year was the weakest August sales total since the 993,100 sold in 1983. Analysts had been forecasting a weak month, with expected sales of about 1.03 million. Most of the major automakers fell short of estimates. The soft demand for autos is seen by economists as another sign of growing weakness among nervous consumers.
Then, this from Bloomberg on September 2, 2010 (emphasis again added):
The U.S. economy is so bad that the chance of avoiding a double dip back into recession may actually be pretty good.
The sectors of the economy that traditionally drive it into recession are already so depressed it’s difficult to see them getting a lot worse, said Ethan Harris, head of developed markets economics research at BofA Merrill Lynch Global Research in New York. Inventories are near record lows in proportion to sales, residential construction is less than half the level of the housing boom and vehicle sales are more than 30 percent below five years ago.
“It doesn’t rule out a recession,” Harris said. “It just makes it less likely than otherwise.”
The possibility of the economy lapsing into another contraction during the next year is 25 percent, he said in a Sept. 1 report. Harris cut his forecast for growth this year by 0.1 percentage point to 2.6 percent and lowered his 2011 estimate by a half point to 1.8 percent, according to the report.
Federal Reserve policy makers agree that a renewed contraction is unlikely, although the risks have risen.
“I expect the economy to continue to expand in the second half of this year, albeit at a relatively modest pace,” Fed Chairman Ben S. Bernanke said in an Aug. 27 speech.
Let me get this straight. August auto sales are at the worst level since 1987 and an analyst at a leading firm states that because the economy is so bad, another recession is unlikely?
Wow. That’s interesting rationale. Because recent statistics are at historically bad levels, the odds favor an increase in economic activity. Of particular interest in the Bloomberg article was the statement that inventories are near all time lows as compared to sales. Given that statistic, this analyst believes that economic activity has to increase as new inventories are produced. There’s just one fact left out of this article. In order to have inventory production that stimulates economic activity, consumers have to be purchasing and they’re simply not.
As I’ve stated in prior blog entries, I believe the economic mess we find ourselves in today is different. This is not an inventory driven recession; it’s a credit driven economic slowdown. Here’s the difference. In an inventory driven recession, inventories are built up faster than consumers purchase the inventory. As a result, production and economic activity slows until the excess inventories are ‘bought down’.
In a credit driven recession, inventories are not all that relevant. A credit driven recession finds consumers at their debt capacities, unable to make additional purchases due to a variety of reasons. Economic activity slows until the excess debt works its way through the system; a process that can be quite time consuming.
In this credit-driven recession, look for the dreaded “double dip” to occur – even with inventories at near historical lows. In a credit driven-recession, nothing else can really happen until debt levels are paid down, individuals begin to increase their spending, and production levels increase.
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