The auto sector will trigger a recession

I have been writing in The Peter Dag Portfolio for some time that the backbones of the economy were two major sectors: auto and housing.

I  have  also been saying the torrid pace of auto sales (more than 17 million units sold) represented a peak. The growth had to slow down because the number of units sold was close to a historical high.

A slowdown in the auto sector would represent another major headwind for the economy - besides concerning credit issues.

The above graph (via ZeroHedge) shows the inventory to sales ratio of the auto sector. Its  upward trend and high level are saying inventories are rising faster than sales. Furthermore, the imbalance has reached pre-2008 levels.

Manufacturers need to reduce production in order to reduce auto inventories. The cut in production will further weaken the economy in a major way.

A weaker economy will have a negative impact on commodity prices, earnings, and equity prices. Bond prices, on the other hand, will be a beneficiary.

As you can see the business cycle is alive and well in spite of the misplaced generosity and goodwill of the central banks.

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Thank you for visiting this site.

George Dagnino, PhD
The Peter Dag Portfolio
Since 1977 
Author, Profiting in Bull and Bear Markets

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