Unemployment and Auto Sales: Disconnecting the Dots
An economic consensus says that auto sales won't come back in force until unemployment significantly declines. The argument is strong at a very basic level: no job, no car, simple as that. But auto sales have shown some pep of late, despite reliably awful labor numbers. Is it possible that auto sales can surge even if unemployment does decline to pre-recession levels?
Demand's the thing
Auto industry information provider Edmunds.com has predicted a U.S. market for auto sales of slightly less than 16 million per year by 2015. For context, the market was at its height was 17 million in 2005. So even four year from now, we won't be back to those heady days.
However, Edmunds.com's chief economist doesn't think that auto sales are being adversely affected by the crummy employment outlook:
[E]mployment has not been the key driver of car sales recently. Rather, car sales momentum earlier this year arose, in large part, from the release of pent-up demand, which in turn was spurred by rising confidence supported by the rising stock market. Recent stock market volatility in the U.S. is likely to subside in favor of stronger performance if enough upcoming second quarter earnings reports return the expected positive results. Consumer confidence, and thus auto sales, should be bolstered by this perceived wealth effect, at least in the short run.Pent-up demand is the critical concept here. Although more than 9 percent of the employable population isn't finding work, there's 91 percent that's gainfully employed -- but that in many cases hasn't been in the car market since before the financial crisis.
Cars aren't houses
A car is an expensive acquisition -- usually second only to a house on most folks' personal balance sheets. But rarely is a vehicle a 30-year commitment (unless you bought a Volvo 240 wagon in the 1980s).
Cars wear out, and after 3-5 years of ownership, they begin to suffer in terms of their residual value. Consumers are attuned to this. In a "normal" economy, they would buy a new car and look to trade it in three years later, while it still retains enough value to offset a good measure of the cost of a new vehicle.
The economy has been anything but normal over the past few years. And that's caused the average age of the U.S. auto fleet to top 10 years for the first time in recent memory.
That's where he pent-up demand is coming from.
More demand can counteract high unemployment
The question is whether pent-up demand will endure, or whether what was available to the auto industry has been either exhausted or pulled forward by stuff like incentives (various discounts offered by carmakers to increase sales).
If the economy can manage to get back on track to grow at 3-4%, then auto sales could continue to defy the bad labor data -- and it will continue to be bad unless growth gets into 5-6% territory.
Personally, I think Edmunds.com is being too conservative with the 16-million-by-2015 prediction. If the second half of 2011 is even sightly better than this last, disappointing quarter, the U.S. market could hit 13 million vehicles. This would set the stage for another Cash for Clunkers program in 2013 -- of course, President Obama would need to be re-elected and Congress would need to cooperate -- that could bring the market back to pre-crisis levels.
Yes, government action would be needed to amplify existing demand. But that demand is already showing some staying power. Now it just needs an extra push.
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Photo: Wikimedia Commons