It is hard to dispute the importance of the auto industry in the US economy. The auto industry has been an important part of American culture for many years. It has employed millions and has been a driving force in the manufacturing sector. This was acknowledged when the auto industry became the only sector outside of the financial sector to be bailed out during the financial crisis in 2007-09. However, things are changing. To better understand this shift, we will examine three topics. We first discuss the growth of the automotive industry and its importance in the economy. We then outline the challenges facing the industry. Third, we look at the near-term outlook for the industry. We highlight two key factors that will lead to recovery.
The share of the auto industry in economic growth is declining.
The post-World War II boom was largely due to the love of cars in America. Between 1945 and 1954, the number of vehicles registered nearly doubled, from 31 to 59 million. In the late 1960s, motor vehicle ownership reached 100,000,000. Autos have become an integral part of American culture. From drive-ins, drive-throughs, and car meetups to rock and roll. It’s no wonder that the motor vehicle sector’s contribution to GDP reached its peak during this time, at 4.9% in Q1 of 1973 (figure 1)
The strong performance of the 1970s continued into the 1980s. The early 1980s recessions saw a significant decline in car production and sales. However, they recovered by the mid-decade. 2 By the year 1990, auto production accounted for only 3.3% of GDP. Figure 1 illustrates the decline of motor vehicle production’s contribution to GDP. In the recession of 2007-09, auto production’s contribution to GDP dropped by a record amount. During the last recovery period (2010-19), prior to the COVID-19 epidemic, the auto industry’s GDP share was just 60% of its late 1960s level. The sector is still responsible for nearly 7% of the manufacturing value added to the economy.
Auto industry cycles are also well-known since car purchases may be delayed by households and businesses when they lack cash. Figure 2 illustrates that during recessions, the auto industry is more volatile than real GDP. During recessions, real motor vehicle production has typically fallen by nearly 12 times as much as real GDP.
In the United States, there are fewer cars for every driver.
In 1978, the number of light vehicles registered per driver was 1.0. This meant that Americans had one car per driver. The rate continued to increase until 2001 when it reached a peak of 1,15. Since 2001, the ratio of vehicles to drivers has stagnated (figure 3). Not only has vehicle ownership declined, but the number of miles driven per driver is also lower than it was in 2004. This indicates a decrease in Americans’ attachments to their cars and trucks over the past two decades. The number of teens with driving licenses is another indicator of a declining branch (see sidebar “Cars no longer a rite-of-passage for American teens ?”).
Cars: no longer a rite-of-passage for American teens
Teenagers are losing interest in cars. The number of teenagers (16-19 years) who have a license is declining. Since 1983, the proportion of teens holding a license peaked at around 50% (figure 4). In 2014, the share of teenagers who chose to get a driver’s license dropped below 50%. This means that less than one out of two teenagers got a driving permit. In a Pew Research Study (2013), it was found that a driver’s license is not a sign of freedom, and getting a license at 16 does not require the traditional rite.
Before the COVID-19 epidemic, the percentage of teenagers who had a driving license remained flat at just over 50% for almost four years (between 2016 and 2019.) Data for 2020 has not yet been released. However, we will likely see a decrease in the percentage of teenagers with a license as a result of mobility restrictions, which led to a steep decline in road traffic in early 2020, the closure of motor vehicle departments issuing licenses, and an increase in people staying at home. This includes teenagers.
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In 2020, the auto industry experienced a V-shaped recovery and recession.
The impact of the pandemic has been shaped by two key periods. In the first two months, demand for automobiles plummeted as consumers became huddled up in fear of COVID-19. Light vehicle sales dropped sharply, from 17 million units in February 2020 down to 11 million units in March and finally to 8,6 million units in April. To prevent the spread, businesses like auto plants, car dealerships, and other supply-side companies were closed. The production of light vehicles also came to a screeching halt. In April 2020, production was down to almost zero units from the seven million units produced in March and eleven million units in February. Figure 5 shows the dramatic contraction of production and sales between February and April 2020 (area shaded grey). Figure 5 also shows the development of sales and production for light vehicles starting in 2019 (unshaded areas). Before the pandemic hit, production was 6.4 million units behind sales in 2019.
The second factor was the substantial shift in consumer demand from services to products, which led to an earlier-than-expected recovery in the market for light cars in the second half of 2020. The car dealerships were suddenly very busy, and the waiting list for new cars was longer. In September 2020, light vehicle sales reached a near-prepandemic level of 16,3 million units per year. Auto producers and suppliers struggled to increase production because of just-in-time production principles and the uncertainty of the availability of critical parts.
In July 2020, despite the disruptions in the auto industry, production of light vehicles exceeded prepandemic levels. Figure 4’s gray-shaded area shows the V-shaped recovery of 2020. After sharp declines between April and September 2020, sales and production both rebounded near prepandemic levels.
The supply chain is a major challenge that will hinder recovery in 2021
In 2021, the gap between demand and production was only mildly reduced (green shaded areas in Figure 5). In 2021, the consumer demand for automobiles increased, and sales of light vehicles reached a record high in April. Production was lower than pre-pandemic levels on the supply side. The 2021 production deficit was 6.1 million, lower than 2019’s 6.4 million deficit. The major supply deficit was caused by imports rather than domestic production. Between Q1 and Q3 of 2021, imports of automobile vehicles and parts decreased for three consecutive quarters. After peaking on April 20,21, light vehicle sales declined for five straight months up until September 2021. Auto inventories were under pressure due to a decrease in the number of cars available at dealerships. In December 2021, the domestic inventory was almost depleted with 115,000 units, which is only 20% of pre-pandemic levels.
The auto industry was affected by supply chain pressures in different ways: production did not fall much, but consumption did. Imports also declined. In the National Accounts, therefore, motor vehicle production declined less than motor vehicle spending. The real motor vehicle production decline in 2020 was 0.4% of GDP in 2020. In order to put this potential impact in perspective, if the pandemic had not happened and motor vehicle production had not dropped, the real GDP in 2021 would have been 0.6 points higher.
The decline in light vehicle sales in 2019 accounted for 0.6% of total consumer spending. Lower vehicle sales could have a greater impact on consumer spending. If weak vehicle sales had remained at the same rate as in 2019, 17 million units per year, in 2020 and 2021, then consumer spending would be US$150 billion more, or 1%.
A few small dents slow near-term recovery
According to IHS Markit, light vehicle sales are expected to reach 15.5 million units in 2022. This is slightly higher than the level of 15.1 million units for 2021. IHS Markit forecasts that light vehicle sales will reach 15,5 million units by 2022. This is a slight increase from the 15.1 million units sold in 2021.
The auto industry may benefit from the change in consumer spending habits. The initial rise in demand for autos in 2020 was boosted by factors such as the preference for personal vehicles to be used as safe modes of transportation.
The Global Supply Chain Pressure Index, developed by the New York Federal Reserve, suggests that elevated global supply chain pressures may have peaked and might start to moderate going forward. Global Supply Chain Pressure Index developed by the New York Federal Reserve means that global supply chain tensions have reached a peak and may start to intervene in the future.12 The Ocean Timeliness Indicator, which measures shipping times starting from an exporter’s port to the destination port, showed that while historically high, the time it took to ship from Asia to Transpacific had decreased by one day, to 113.13 Other indicators, such as Taiwan’s surge in semiconductor exports (92% of leading-edge semiconductor production is produced by Taiwan
