Auto parts freight volumes continue to recover, while demand for many durable goods falls. Is it sustainable? Carloads for automobiles and parts rose an average of 11% year-on-year in October, part of a recovery trend that began earlier in the year. The Detroit Outbound Bidding Volume Index (OTVI) shows a historic surge in activity since this spring. The Detroit market is the best indicator of auto freight activity in the United States due to the high concentration of plants and suppliers. These moves contradict most data from other sectors and markets.
Retail was the first to disappear as consumer demand for goods fell. After the demise of the Omicron variant, the populace began spending more dollars on travel and experiences.
And while electronics and furniture are items bought to stay at home, automobiles allow the consumer to leave the home, which has not been possible as often in the past two years.
If we combine this with some supply chain relief, automakers can now complete vehicles that have been waiting to be completed. With the growing demand for electric vehicles, this sector is experiencing something of a renaissance.
The average age of vehicles hit new highs earlier this year as consumers kept their vehicles after driving less during the pandemic. The reasons are not entirely clear, but some of this trend may be reversing.
Similar mechanisms exist in commercial vehicles. According to ACT Research, truck makers are also seeing a delay in demand recovery as Class 8 orders hit record highs in September. Airlines that have amassed cash thanks to a booming market have also aged their fleets as new equipment has not been as readily available.
Although results from many consumer vehicle manufacturers have been somewhat mixed, their earnings have been largely positive. Ford (NYSE:F) posted a 10% increase in sales in the third quarter even as its earnings were impacted by supply and spending concerns.
Ford and GM (NYSE: GM) reported double-digit growth in new car sales last quarter. Although Ford’s growth was lower than expected, it’s an example that the auto sector hasn’t yet felt the same drop in demand as retail.
Although this particular segment of the economy seems somewhat immune to broader economic direction at the moment, its leadership teams have looked to temper expectations for the coming year due to tougher consumer conditions.
The lesson for transportation providers working with the automotive industry is simply to leverage volume while it lasts. Short term demand remains good and supply issues will persist into 2023. Electric vehicles could also provide a softer landing for this sector. But the long-term prospects have flaws.
Consumers are returning to some bad spending habits by overspending. Auto loan arrears are at 10-year highs. Ultimately, the health of this sector depends on the fiscal health of the consumer.
Much of the carload is transported under specific arrangements with somewhat specialized carriers, meaning there are high barriers to entry for newcomers. Opportunities to enter this area have increased in recent years, but this window may be closing.
And while the auto sector has been caught in a latent wave of activity in the wake of the pandemic, it is poised to align more closely with the rest of the consumer economy.
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