Auto Industry Driving the Recovery

Auto Industry Driving the Recovery

In 2009, when there seemed no bottom to how far the economy might fall, a series of photographs circulated online showing thousands of unsold cars piling up around the world. With consumers paralyzed by the credit crisis, automakers filled docks, vast meadows and even abandoned airport runways with the vehicular glut. The striking yet surreal aerial photos could have hung on a gallery wall were it not for the economic devastation they represented. Today, some economists are once again warning the world is on the cusp of another crisis as Greece burns, gas prices remain high and America's job market stagnates. Only this time instead of pulling down the global ECONOMY, the AUTO SECTOR is seen as the best hope of jump-starting the recovery.

Call it Cars 2--not the animated big-budget sequel making its way through theatres, but the return of cars and trucks as key drivers of the critical U.S. economic machine. "Americans still love their cars," says Michael Burt, who tracks industrial economic trends for the CONFERENCE BOARD OF CANADA. "The types of vehicles they may purchase will change, but they're continuing to buy." The question now is, how long can America's love affair with metal and rubber overcome the economic headwinds?

On the surface, the auto sector's performance in June seemed disappointing. When American sales for the month were tallied, the results fell short of analysts' forecasts. Sales growth came in at 7.1 per cent, according to Autodata Corp. That was less than the eight to 10 per cent analysts had predicted, and slower than the growth registered in May, which was already a sluggish month.

However, the big-picture data masks dramatic improvements in the industry. Most importantly, Detroit carmakers are on a roll. GENERAL MOTORS sales climbed 11 per cent, while Ford sales increased 14 per cent. Chrysler, meanwhile, saw its sales jump 30 per cent, the biggest increase since 2007. It was a similar story in Canada, where the Big Three of Detroit all saw big gains in sales, while the Japanese carmakers posted declines. The overall numbers would have looked a lot better were it not for the fact that Japanese automakers are still recovering from the earthquake and tsunami in March, which severely disrupted their supply chains. In June, Toyota's sales fell 21 per cent, while Honda saw a decrease of 24 per cent. In the case of Toyota, its inventory of vehicles collapsed 40 per cent compared to last year. "It's very difficult to sell cars and trucks when you don't have any," Don Esmond, senior vice-president of operations for Toyota Motor Sales USA, told the Detroit Free Press.

Auto sales in the U.S. are likely to come in 20 per cent below their annual average of 16 million this year. But the important thing is that gap is closing much faster than was expected even six months ago. "Automakers don't have a problem selling," says Burt. "They have a problem meeting demand because of short supply. That's good news for the industry."

It also bodes well for Canada's auto industry, since 84 per cent of vehicles built here are sold in the U.S. According to Carlos Gomes, an economist at Scotiabank, production at Canadian auto factories is expected to jump 21 per cent in the third quarter, compared to just a three per cent gain in the first half of the year. That, in turn, is set to drive profits in the Canadian auto assembly industry to close to $1 billion this year, predicts Burt, up from a paltry $114 million in 2010.

Another sign of the demand in America is the sharp rise in prices for used cars in recent months. That's because vehicle output declined so sharply after 2008, leading to a shortage of two- to three-year-old vehicles for resale. In June, the National Automobile Dealers Association estimated that trade-in values would rise as much as 17 per cent that month. Last week, a Florida Toyota dealership made headlines when it paid more to buy back a used Prius hybrid from a customer than the dealer had sold the car for 15 months earlier, despite the fact the customer drove the vehicle more than 14,000 km.

One key factor powering sales is the pent-up demand for new cars and trucks. The average age of vehicles on America's roads is now 10 years, compared to a historical average age of eight years, says Gomes. Auto lenders have also opened up the taps, even for those drivers with dubious credit, according to a new report from Equifax, the consumer credit bureau. Just as important, the carmakers, particularly Ford and GM, have revamped their offerings with stylish small cars at a time when consumers are struggling with high gas prices. While the Ford F-Series and Chevy Silverado pickup trucks sold the most overall, the Chevy Cruze, Chevy Malibu and the restyled Ford Focus were the top-selling cars. (The Toyota Camry is typically number one, but vehicle shortages knocked it out of the top spot.)

With America's housing market still a wreck, no one expects the auto sector alone to steer the country to boom times. That would be akin to a Ford Focus pulling a burning motorhome up the side of a mountain. But the industry is helping keep the recovery in gear. "The ramping up of production in the auto sector is going to make a significant contribution to overall economic activity in the coming months," says Gomes at Scotiabank, who predicts vehicle production in North America will jump 18 per cent from last year to an annualized 14 million units, putting it at the highest level since before the economy began to crater in mid-2008. As work on the assembly lines picks up, Gomes says global GDP growth could get a boost in the third quarter of 0.5 percentage points on an annualized basis.

The U.S. economy has already benefited as foreign car companies move production to American soil, adding new jobs and boosting local economies. In May, Volkswagen opened a new plant in Tennessee, employing 1,200 production workers. Toyota plans to move production of the Corolla from Japan to Mississippi. Meanwhile, Honda has said it will speed up the transfer of work from Japan to plants in Indiana, Ohio and Alabama.

The road ahead is bumpy. Consumer confidence has slipped and employment growth has slowed. But the auto sector is far healthier than it was before the Great Recession, thanks to a painful period of restructuring. And that has put it in a position to not only navigate a stormy economy, but to give a boost to the recovery as well.

Maclean's July 18, 2011