Roaring auto sector could charge up U.S. growth

November 2, 2012

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Economists love motor analogies, and for good reason: they are very useful in illustrating the ebb and flow of economies. In coming months, maybe even years, the help from the auto sector could become a lot more literal, argues Paul Dales, senior U.S. economist at Capital Economics in London. In particular, he expects rising sales following years of depressed consumer spending on vehicles in the wake of the Great Recession could add as much as 0.25 percentage point to U.S. gross domestic product growth per year over the next four years. Here’s why:

The rise in new vehicles sales in September, to 14.9 million from 14.5 million in August, was significant as the number of new vehicles being purchased is now higher than the number being scrapped. This comes after four years in which the total number of vehicles in operation has been declining.

That fall was because when the recession hit and credit seized up, both households and businesses had little choice but to run their existing vehicles for longer. It is possible that 10 million fewer new vehicles have been sold than would have been the case if there was no recession.

At some point the maintenance costs of driving an aging vehicle will outweigh the purchase costs of a new one. And given that new car prices have been stable and that auto loan financing rates have dropped to record lows, conditions appear to be in place for this pent-up demand to be released.

Hurricane Sandy, downgraded to a post-tropical storm but still enormously devastating to parts of the U.S. East Coast, already had a negative impact on the auto sector in October, bringing the annualized sales total back down to 14.3 million.

But Dales expects that drag to be temporary. He said in an email:

Given that the Hurricane didn’t really hit the states where the bulk of the auto makers are based, it shouldn’t affect production.

As some vehicles will need to be scrapped after the Hurricane, however, new auto sales may rise in the coming months by a bit more than would otherwise have been the case. These sales would be on top of the “pent up” demand that we highlighted in the research publication. As such, the total boost to the economy may be a bit larger than we expected in the near-term, although not significantly so.

Which doesn’t mean growth is about to surge, but suggests the recovery has at least some cushion against possible shocks. Explains Dales:

This boost to growth will probably just offset the growing drag from elsewhere, such as the slowdown in both the euro-zone and China. Nonetheless, the possibility of a surge in new vehicle sales is a rare upside risk to our forecast that GDP will rise by just 2% next year.

 

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