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This one indicator can tell you exactly what's happening in the economy

by , 27 August 2020
This one indicator can tell you exactly what's happening in the economy
There are hundreds, if not thousands of economic indicators investors like us can look at to gauge how the economy is doing. Employment figures, GDP Growth, CPI, the Trade Balance, these are just a couple of the well-known ones. There are more obscure ones, like the Buttered Popcorn index, the R-word index or the Coupon Redemption index.

But you don't need to know all of these. In fact, there's one indicator that's predicted recessions, shows when the economy is recovering and can tell you much about how business is doing.

The indicator I'm talking about is the new car sales (and its variants such as commercial vehicle sales, truck sales etc).
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Vehicle sales are a proxy for the economy
 
Think about it. If people are positive about their jobs, making enough money and they have cash to spare – they buy new cars… If you’re worried about your job, or there’s a lot of financial pressure, you are less likely to splurge on a new car.
 
But it goes deeper than this….
 
Think of commercial vehicle sales.
 
If people are spending more doing online shopping, or at retail stores, there’s more goods that need to be delivered.
 
That means logistics companies buy more trucks for deliveries.
 
Similiarly – car rental companies buy more vehicles as demand from business people and tourists travelling around SA increases.
 
Increased car sales also mean there’s more manufacturing activity – as car manufacturers, parts manufacturers are kept busy with new work. And this even flows through to the mining sector with demand for steel, aluminium and PGMs being affected.
  
This rule holds true internationally as well
  
A study done in the USA, published in the NYTimes illustrates how car sales can predict the economy very well.
 
Basically, if you take car sales for the past 12 months, compared to those of the previous 12 months you can predict recessions in the USA.
 
The rule is if the figure is down 2 percent or more, a recession is either under way or set to begin within a few months.
 
The available data goes back to 1968, a period in which the American economy has recorded six recessions. The “dealer doldrums indicator,” as they call it, called five of the recessions, missing the 1981-82 recession only because it was not persuaded the 1980 downturn had ever ended. It has never warned of a recession that did not occur.
 
The risk of using 12-month figures is that by the time bad news is clear from new-car sales, it can be overwhelmingly obvious from other economic indicators. But such long periods avoid the possibility of false readings because of the volatility of new-car sales.
 
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What car sales say about our current situation
 
 
In this chart on total vehicle sales for South Africa you can see a clear trend. The 8 months before the Covid-19 pandemic started – sales averaged 43,752 cars a month.
 
April – which we know was the month with the hard lockdown and an economic standstill was at its height, saw vehicle sales freeze for their lowest number on record.
 
May picked up, with June and July figures nearing around 75% of the average.
 
There are two interesting observations here – estimates are that for the April-June quarter we’ll see GDP shrink by as much as 60%. Vehicle sales during this time shrunk by around 65%.
 
Simliarly, a Swiss bank estimated that by August 2020 SA economic activity returned to 77% of its normal levels. Considering car sales figures for the end of July 2020, you see that car sales had reached around 74% of their average levels before the lockdown. So simply put – this figure is a proxy for economic activity. And while it isn’t 100% accurate it can give you a very quick snapshot of how the economy is doing, and where it is going.
 
Clearly our economy, while still down considerably is picking up well.
 
I had a look at this indicator for China and the USA… China’s car sales have returned to around 91% of average sales before the lockdown. In the USA car sales have recovered to 86% of pre-pandemic levels by end of July 2020.
 
I’ll definitely have my eye on car sales in the coming month – as a leading indicator of where GDP growth is heading and how our economy will recover in months ahead.
   
Here’s to unleashing real value
 
Francois Joubert
Editor, Red Hot Penny Shares
 
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This one indicator can tell you exactly what's happening in the economy
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