Analysis | The auto industry is the economy’s best hope right now – The Washington Post | CarTailz


If you had to point to one culprit that has held back the economy for the past 18 months, it would be the auto industry. Supply chain issues like semiconductor shortages have contributed to weak economic growth, anemic productivity, soaring prices and higher interest rates as the Federal Reserve struggles to control inflation.

While the auto industry is still far from normal, the data we’ve gotten in the last month suggests it’s finally on the mend, leading to some better-than-expected economic numbers over the next few quarters. We are already seeing economic growth accelerating while inflation is declining.

The seasonally adjusted auto sales chart shows how far the industry has been from normality since the pandemic began. In the years leading up to the pandemic, new car sales were steady at 17 million a year. They slumped in March 2020, rebounding later that year through early 2021, but then fell sharply into the summer as semiconductor shortages meant fewer vehicles were for sale. As of July 2021, sales are around 14 million a year, three million below what one might expect.

This deficit has affected the economy in many ways. Automobiles detracted from real gross domestic product growth by 2% in the third quarter of 2021 due to the slump in sales and has yet to recover until the third quarter of 2022. The industry’s troubles have hurt productivity growth because of the way productivity is calculated — vehicles that would sell for tens of thousands of dollars aren’t counted as output because they sit on factory floors waiting for chips, which often aren’t cost a lot .

And the impact on inflation has been profound. A lack of vehicle production has pushed up prices for new and used cars alike — when dealers don’t have much to sell, they don’t have to offer buyers discounts, and a lack of inventory is forcing buyers into the used-car market, which is also pushing prices raise. These two categories make up 10% of the weight in the core measure of the CPI inflation report.

And those aren’t even the only categories hit by the shortage. Motor vehicle maintenance costs have skyrocketed as the shortage of vehicles for sale has forced consumers to hold on to older, faulty vehicles longer than they would like, keeping mechanics busy at a time when the industry is struggling is struggling with labor shortages. And if it costs more and takes longer to repair vehicles, it costs auto insurers more money, who then pass those costs on to policyholders. Inflation for these two categories, which make up another 4.5% of the core CPI basket, has been above 10% over the past year.

All of these downstream effects mean that it’s a big deal for the economy that production is finally normalizing. Earlier this month we learned that October new car sales rose to 14.9 million (at a seasonally adjusted annual rate) from 13.5 million, the highest since January. That’s still well below pre-pandemic normal, but it’s huge for performance metrics like GDP.

Because if November and December auto sales just keep up with the October rate, that’s a 10% quarterly increase. And for the purposes of calculating GDP growth, we annualize that number – 10% annualized is almost 50%. With auto sales accounting for about 3% of GDP, that alone would contribute between 1% and 1.5% to GDP growth this quarter. Indeed, when the GDP growth tracker released by the Federal Reserve Bank of Atlanta included the October vehicle sales report, their estimate of fourth-quarter GDP growth increased by 1.2%.

The Atlanta Fed says real fourth-quarter GDP growth is currently at 4%, in large part due to the boost from auto sales. That could emerge as we get new data, but it also suggests that the fourth quarter could end up producing the fastest GDP growth of the year.

This would also be good news for productivity growth, which has been weak for some time. Faster economic growth without a corresponding recovery in the labor market means that productivity makes all the difference.

Most importantly, the normalization of auto production and inventories takes the pressure off inflation. Used car prices are falling now. The rate of growth in new car prices has slowed as customers have a little more inventory to choose from. Hopefully this will lead to less pressure on vehicle maintenance and insurance prices. And lower inflation is allowing the Fed to ease up a bit – Thursday’s weak CPI report sent equity markets higher and mortgage rates sharply lower, easing some of the pressure on the housing market.

This push of cars couldn’t come at a better time. The housing industry has been crippled by high mortgage rates, and layoffs and hiring freezes have risen in Silicon Valley as investors demand better cost control from tech companies. Normalizing auto production and sales could propel the economy through mid-2023.

There is still room for improvement, but the auto industry is the best reason to hope for economic growth and an inflation surprise in the coming months.

More from other authors at Bloomberg Opinion:

The Peak Sees In But Markets Risk Overdoing It: John Authers

Central banks get a breather but can’t rest: Mohamed El-Erian

What does the Fed’s ‘sufficiently hawkish’ mean?: Jonathan Levin

This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.

Conor Sen is a columnist for the Bloomberg Opinion. He is the founder of Peachtree Creek Investments and may have interests in the areas he writes about.

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