OESA Sees Rising Supplier Pessimism

TRAVERSE CITY, MI – The bears are loose in Northern Michigan, says Original Equipment Supplier Assn. Chief Economist Charles Chesbrough.

But Chesbrough, who came to the group from IHS Automotive two months ago, is referring not to the black bears prowling the woods around here but to the growing economic pessimism among parts makers.

“The bears are starting to creep in,” Chesbrough tells the 2016 CAR Management Briefing Seminars.

According to the OESA’s bimonthly supplier survey, parts-maker optimism in July fell to its lowest level in four years due to concerns over uncertainty regarding a then-undetermined Brexit vote and worries U.S. economic growth may be slowing. Smaller suppliers were more pessimistic than larger ones, the report says, and while Brexit was on all of their minds, very few thought it would affect their businesses directly.

Nonetheless, Chesbrough says they are looking for the next trigger.

“The U.S. economy is entering its seventh year of recovery, and after reaching vehicle-sales highs last year, what happens next is more uncertain,” says Chesbrough, executive director-Strategy & Research and senior economist at OESA. “The key question is, how long can the party last?”

Buying conditions today remain strong, he says, noting job creation is robust and low interest rates and lengthening loan terms are keeping vehicles affordable. Strong products also are attracting the attention of consumers, contributing to more than 17 million light-vehicle sales each of the past two years. WardsAuto forecasts sales this year to reach 17.6 million.

Chesbrough traces supplier economic concerns back to the recession clock, which based on 50 years of employment data suggests the industry’s recent run of record sales is due to come to end, with rising jobless claims coming.

“This is something the executives in the supply base are watching,” he says of the data, which currently suggests a firm job market. “They are well aware (of) what the recession clock is insinuating.”

Consumer-buying conditions also are expected to change on an anticipated hike in interest rates, raising vehicle prices and lifting production costs. Energy costs likely will rise, too.

“Vehicle supply and demand will be impacted,” Chesbrough says.

The good news is suppliers are more prepared than ever to take on a lull in U.S. vehicle sales, say a strong 36% of those polled by the OESA, due to parts-maker consolidation and business diversification in response to the Great Recession of 2009.

“So even if the downturn occurs, we are in much better shape,” Chesbrough says. “Please be aware, I’m not trying to feed the bear. I’m only suggesting we are entering a period of rising uncertainty.”

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