US auto sector and broader thoughts on the US labor market - BBH

"Light vehicle production is set to decline, and this means more layoffs, and that in turn, creates few customers," argues Marc Chandler, Global Head of Currency Strategy at BBH.

Key quotes:

"GM announced in North America it would produce 150k fewer vehicles in H2 than it did in H1.  Its inventory levels are high are around 104 days of sales.  It wants to bring this down to 70 days by the end of the year.  Ford says it will cut Q3 output by 34k vehicles.  Shifts are being reduced."  

"There is a shift in consumer preferences away from passenger cars, and toward SUVs and light trucks, but the slowdown in sales is significant.  GM sales in July fell 15%, which is the steepest decline in over a year.  Ford's decline was the sharpest since last October.  Fiat-Chrysler sales posted the second largest drop of the year.    An important takeaway here is that the auto sector will likely be a drag on the industrial production and manufacturing output.  It cannot be counted on a tailwind for the labor market."

"The main challenge with the US labor market is not job creation.   Although the pace of jobs growth has slowed, it remains sufficiently strong to absorb more slack in the labor market.  In 2016, the US created an average of 187k net new jobs a month.  In H1 17, it created 180k a month.  The problem for many American households and the Federal Reserve is that wage growth remains meager."

"From the Fed's point of view, headline inflation converges to core inflation, and core inflation converges to wage growth.  The weak wage growth is an obstacle to the achievement of the Fed's inflation target.  There are many factors that shape the labor market.  One of the important ones that suggest that wages may not be rising because of slack is the participation rate.  The participation rate of men has fallen, and recently Yellen drew attention to the opioid problem.  The US is also one of the few countries in which the women participation in the labor force is also falling."

"On the other hand, it is a relatively new phenomenon for central bankers to advocate the need for higher wages.  This is true not only of the Federal Reserve, but also the BOJ, the ECB, BOE, and Bank of Canada.  The disparity of wealth and income has emerged as a potent political issue across the political spectrum.  However, governments are stopping short of help strengthen the only institutions whose raison d'etre is boosting wages and living standards: trade unions.  This is not an ideological claim but a pragmatic one."