While the auto industry is still a long way from normal, the data we’ve had over the past month suggests it’s finally starting to recover, which should lead to some surprisingly good economic data in the coming quarters. We’ve seen economic growth accelerate while inflation is falling.
A seasonally adjusted chart of auto sales shows how far the industry has been from normal since the pandemic began. In the years leading up to the pandemic, new vehicle sales had remained in the 17 million-unit-per-year range. They plummeted in March 2020, recovered later that year into early 2021, but then fell sharply in the summer as semiconductor shortages reduced the number of vehicles available for sale. Sales have been growing at an annual rate of about 14 million since July 2021, 3 million below expectations.
This deficit affects the economy in various ways. Automobiles, which dragged down 2% real GDP growth in the third quarter of 2021 due to lower sales, have yet to rebound by the third quarter of 2022. Problems in the industry have hampered productivity growth because of the way it is calculated — cars that sell for tens of thousands of dollars don’t count as produced because they sit on factory floors waiting for typically inexpensive chips.
The impact on inflation is profound. A lack of car production pushes up prices for new and used cars — dealers don’t have to offer discounts to buyers when they don’t have much to sell, as does a lack of inventory that forces buyers into the used-car market, driving up prices. These two categories account for 10 percent of the weight of the CPI Inflation Report’s core measure.
These aren’t even the only categories affected by the shortage. Motor vehicle repair costs are soaring as a lack of vehicles for sale forces consumers to hold onto older, faulty vehicles for longer than they want, keeping mechanics busy as the industry grapples with a labor shortage. When it costs more and takes longer to repair a vehicle, it costs auto insurers more money, and insurers then pass those costs on to policyholders. Inflation in these two categories, which account for 4.5% of the core CPI basket each, has exceeded 10% over the past year.
All of these downstream effects mean that an eventual normalization of production could mean a lot for the economy. Earlier this month, we learned that new vehicle sales jumped to a seasonally adjusted annual rate of 14.9 million in October from 13.5 million, the highest level since January. That’s still well below pre-pandemic norms, but for measures of output like GDP, it’s a huge number.
That’s because if vehicle sales in November and December were only to match October’s, that would translate into a 10% quarter-on-quarter jump. For the purposes of calculating GDP growth, we annualize this figure – 10% annualized is almost equal to 50%. Auto sales account for about 3% of GDP and this alone will contribute 1% to 1.5% to GDP growth this quarter. Sure enough, when the Atlanta Fed’s GDP growth tracker included October’s auto sales report, its estimate for fourth-quarter GDP growth increased by 1.2%.
The Atlanta Fed said real GDP growth in the fourth quarter is now running around 4%, largely due to a boost in auto sales. That’s likely to fall as we get new data, but it also suggests that the fourth quarter could end up producing the fastest GDP growth of the year.
That’s also good news for productivity growth, which has been weak for some time. Faster economic growth without a corresponding pick-up in the labor market means productivity makes the difference.
Most importantly, the normalization of auto production and inventories has eased inflationary pressures. Used car prices are falling right now. New-vehicle price growth slowed as there was slightly more inventory available for customers to choose from. Hopefully this will ease the pressure on vehicle maintenance and insurance prices. Lower inflation is a relief for the Fed — Thursday’s weak CPI report sent stocks soaring and mortgage rates sharply lower, taking some pressure off the housing market.
This boost from cars has come at just the right time. The real estate industry has been crippled by high mortgage rates, and layoffs and a hiring freeze intensified in Silicon Valley as investors demanded better cost control from technology companies. Normalization of vehicle production and sales could provide momentum to the economy by mid-2023.
There is still room to grow, but the auto sector is the best reason to hope for a growth and inflation surprise in the coming months.
More from other Bloomberg Opinion writers:
Peak in sight, but market at risk of overuse: John Authers
Central banks take a breather but can’t rest: Mohamed El-Erian
What does the Fed’s “sufficient restraint” mean? : Jonathan Levine
This column does not necessarily reflect the views of the editorial board or Bloomberg LP and its owners.
Conor Sen is a Bloomberg Opinion columnist. He is the founder of Peachtree Creek Investments and may have stakes in the areas he writes about.
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