Will the Economy Keep on Truckin’?

Lately, I’ve written about the many troubling data points that suggest stocks are fully valued and primed for a correction. Traditional valuation metrics such as price to earnings ratios are relatively high, while corporate earnings have stagnated. But there is one metric that hasn’t gotten much attention, and it bears scrutiny given its significant implications.

From 2007 thru 2014, sales of automobiles and light trucks moved almost in lockstep with each other throughout the ups and downs of the Great Recession. But three years ago they diverged, with sales of automobiles beginning to wane while sales of light trucks continued on its upward path. In fact, by 2015 sales of light trucks exceeded their pre-Great Recession apex of roughly nine million vehicles sold annually and has continued to climb higher, while auto sales are approaching their Great Recession nadir of fewer than six million vehicles.

As someone who has been following stock market indicators for more than thirty years, I learned a long time ago that a divergence of that magnitude usually means that a profound shift has occurred in the economy, even if it isn’t clear what it means at the moment. What is particularly compelling about this data set is that light trucks are the vehicle of choice for small businesses, which use them for everything from delivering flowers to transporting construction materials.

That being the case, an argument can be made that the surge in light truck sales is indicative of greater optimism by small business owners. Even a relatively inexpensive light truck costs more than $30,000, so a purchase of that size is not made indiscriminately. And this is not a case of business substitution; two light trucks cannot carry the same type of load as one heavy truck.  

However, the other possible explanation for the growing popularity of light trucks is that this category includes SUVs (Sport Utility Vehicles), which are primarily used for personal transportation and not commerce. The divergence between auto and light truck sales coincided with a big drop in oil prices, which drove down gasoline prices to less than $3 per gallon. Combined with improved fuel efficiency, SUVs have become more affordable to own than they were ten years ago when oil traded above $100 a barrel.

It turns out the answer isn’t as simple as comparing the sales of pickup trucks to SUVs to figure out which way the trend is going. Sales of SUVs have been increasing, but in total they amount to less than the number of sales of pickups, which also grew over the past twelve months but to a lesser extent. Last month, sales of SUVs of all sizes amounted to 163,000 vehicles compared to 241,000 pickup trucks sold (in case you’re wondering, Minivans were the big loser over the past year, posting a 28% sales decline).

If this turns out to be nothing more than a simple case of consumer substitution by soccer moms trading in their Minivans for SUVs thanks to cheap gas then there is no reason to believe this trend has any predictive value for the economy as a whole. But if there is more to it than that, especially if more small businesses are investing in the growth of their businesses by purchasing vehicles to help them generate more revenue down the road, then there may be good reason to conclude that a subtle, but potentially profound, shift is occurring in the American economy.

This could also turn out to be good news for U.S. automakers Ford and General Motors, whose stock prices have gotten pounded lately due to concerns over declining auto sales. But trucks carry a higher profit margin, and Ford and GM compete comparatively well in those categories. Historically, the thinking has been that car sales are a more accurate predictor of overall revenue, but that may no longer be the case.

Investors who guess correctly on this one could wind up in the driver’s seat. Ford is now trading at its lowest share price since December of 2012, while GM stock is back to where it was in May of 2013. While the rest of the stock market has gained nearly 50% over that same span, these two laggards have been stuck in neutral. If the uptick in light truck sales turns out to be a long-term trend and not a short-term fad, both of these stocks could have a lot of catching up to do.

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