We historically have focused on the health of the automobile and housing industries as our measure of how strongly or weakly the economy is performing.
Starting last year, the recovery in the domestic automobile industry was perceived as an omen of a recovering economy on its way to a faster pace of economic activity. That belief soon faded as the U.S. economy slumped. Part of the strength of the U.S. auto manufacturers was that they had regained market share lost to foreign car manufacturers due to their more competitive position as a result of their restructuring as mandated by the auto bailout.
What may have been lost on some of those who were making auto sales forecasts, however, was the impact the Japanese earthquake and tsunami had on the Japanese auto companies with U.S. manufacturing plants. Due to the damage to facilities and the loss of electricity, Japanese auto manufacturers were unable to produce and ship cars, but more importantly they couldn't produce parts needed for building vehicles in the United States.
While the Japanese auto companies struggled with their supply problems, domestic auto companies were able to ramp up their production to meet the rising demand. Following the 2008 financial crisis and the 2009 recession, new car purchases fell off from the record-setting rates of the early 2000s.
The slowdown in auto purchases has contributed to the average age of U.S. autos increasing to 11 years, a modern record. The aging of the domestic auto fleet reflected a pent up demand for new cars. Last year, forecasters predicted that auto sales would average well above 14 million units in 2012 and then increase by at least one million additional units each year thereafter until the industry was producing upwards of 18-20 million cars a year.
The weak gross domestic production (GDP) performance of the U.S. economy in the first half of this year has not been reflected in the monthly auto sales figures. While the monthly sales figures have bounced around a little, for the first seven months of this year the industry has averaged a monthly sales rate at a seasonally adjusted annual rate of about 14.1 million units. The challenge for the industry is that a number of forecasts called for higher sales.
At an auto trade show last week, one of the leading auto industry consulting firms, LMC Automotive, reduced its 2012 and 2013 sales forecasts by roughly 200,000 units each year. Their new forecast is for the industry to sell 14.3 million units in 2012 and 15.0 million units in 2013. We have presented the record of annualized monthly sales since 1993 in Exhibit 4.
In order for the industry to reach a 14.3 million unit-sales-year in 2012, the industry will need to sell monthly at an average seasonally-adjusted, annual rate of 14.5 million units for the balance of the year. Unfortunately, the highest monthly rate so far this year was a 14.4 million annual rate, with several months reaching only a 13.9 million unit rate. If the industry can attain the 15.0 million annual sales estimate in 2013, it would be the highest annual sales rate since 2007, or immediately prior to the financial crisis.
With the economy slowing and unemployment remaining high, one has to question just how willing Americans will be to step up to buy new cars. A recent New York Times Magazine article focused on the oddity of very cheap monthly leasing rates for new cars. The article's author assumed initially that the low rate reflected that the auto industry was doing poorly. He subsequently learned that because of the relatively strong new car sales in the prior year and a half, consumers looking for gently used cars have been confronting very high prices. These high used-car prices are the result of the high average age of cars being replaced by newly purchased vehicles. Those older cars are not attractive for dealers to sell to customers. As a result of this supply imbalance, auto manufacturers are interested in creating a future supply of gently used cars, thus the low monthly lease rates in order to induce buyers to lease cars instead.
In some cases, consumers can get a new vehicle they otherwise couldn't afford to purchase. The financial impact for the auto companies from the low monthly lease cost presumably will be offset by a much stronger used car market that boosts residual values in the future. That strategy may prove successful, especially if the U.S. economy continues to underperform its natural growth rate as more buyers will opt for cheaper vehicles.
What we have learned about the auto industry is that it now only represents about three percent of the domestic economy, which would suggest that it alone cannot have much impact on the overall economy's performance. That may be a disappointment because the Obama administration has based much of its economic strategy on rebuilding the auto industry.
Last year, the recovery of the domestic auto companies was helped by the Japanese situation. What we have seen in the past several months is that the Japanese auto manufacturers have restored their supply chains and productive capacity. As a result, they have regained the market share they lost to the American auto companies, and will battle to take more share in the future. As the German auto manufacturers are now mounting a market share battle with the Japanese companies, the American manufacturers may lose even more market share. That is not a particularly positive situation for unemployed workers.
Most readers are aware of the very poor condition of the U.S. labor market. It has been, and will continue to be, impossible to avoid knowing how bad the labor market is given the campaigning for the upcoming presidential election. What we know about the labor market is that the economic recovery since the 2009 recession has been the weakest in terms of employment gains in the past 75 years. The chart in Exhibit 5 demonstrates just how this recovery ranks in terms of job losses compared to all other recoveries since the end of World War II.
During the boom period of the 2000s, the U.S. auto industry employed about 11 million workers. Today, after the financial crisis and the recession and economic stimulus effort, the industry employs only 7.5 million workers.
Is it possible that those missing 3.5 million auto manufacturing jobs will be restored if the industry is able to get back on the growth trend some forecasters are predicting? Time will ultimately tell, but we have to believe the reconstituted domestic auto industry and the newly built manufacturing plants of the Japanese, Korean and German auto companies will be more efficient than manufacturing plants of the past. Therefore, we expect the future auto industry to be able to match the peak output of the pre-financial crisis period with fewer workers. That means we will need to find other jobs in the recovering economy to employ those former auto workers who have seen their jobs permanently lost. The economic and financial policies of the current administration are not conducive to meeting that goal.
G. Allen Brooks is Managing Director of Houston-based investment banking firm Parks Paton Hoepfl & Brown. This article originally appeared in the Aug. 14, 2012, issue of PPHB's newsletter "Musings from the Oil Patch."