The auto industry is back to pre-recession levels. But why?

August 2, 2013

Buy buy buy! (Keith Srakocic/AP)

Americans love their cars and trucks. And in July, they bought a whole lot of them. Chrysler and Ford each reported their July sales were up 6 percent from a year earlier, while General Motors notched a 12 percent rise, according to Wards Auto. Some foreign automakers notched even stronger gains, including 13 percent for Toyota and 16 percent for Honda.

In fact, the auto market has now completed its long slog back to pre-recession levels. Americans bought cars and trucks at a 15.6 million annual rate in July, a bit below June and about the level of December 2007, when the recession began, and up from a low of 9 million in early 2009.

It is an amazing comeback in many ways. There were more than 16 million vehicles sold each year in the middle of the last decade, and to many of us that looked like the artificial bubble. It was sustained, after all, by rising home prices (which made people feel wealthier, even if the rises were illusory), easy credit (so even people who probably shouldn’t have could get a car loan), and novel mortgage products that made it easy to borrow against a house to buy a car.

But with the economy still weak and unemployment still high, how is it that auto sales have returned to pre-recession levels? The answers fall into three buckets, each with different implications for the future. “There are several positive factors here, and I don’t think anybody really knows for sure how much each factor contributes to the increase,” said Tom Libby, a senior forecasting analyst at Polk, the automotive data research company.

First, there are pent-up demand effects. When Americans bought only around 10 million cars and trucks in 2009 or around 11 million in 2010 or 13 million in 2011, the people who normally would have bought a vehicle presumably kept driving their old car. But no car runs forever, and eventually the people who didn’t buy a new car in 2009, 2010, or 2011 have to trudge to the dealership and plunk down some cash. That seems to be happening now; the average age of U.S. autos was 11.2 years at the end of last year, according to Polk, the highest on record.

That effect, of people replacing their aging cars that they didn’t replace during the aftermath of the recession, may have longer to run. One interesting question is whether it even causes auto demand to overshoot the long-term sustainable demand of 16 million for a year or two. That would be good for the economy in the short run, though it could cause a bit of pain as demand subsequently reverts to a more sustinable level.

A second factor in the strong demand for autos is low interest rates. The average rate on a 48-month new car loan was 2.64 percent yesterday, according to Bankrate.com. That is little changed this year; while rates on mortgages and other long-term forms of borrowing have risen sharply in the last three months, shorter-term auto loans have been spared.

But low rates don’t matter much if people can’t actually get loans at those rates. Part of the collapse in demand for autos in 2009 resulted not just from people losing their jobs and not having the confidence or funds to buy a car, but from banks and other lenders cutting back on the availability of loans. It’s tricky to measure how “tight” or “loose” lending standards are, but one way to get at it is the percentage of people who are leasing their new automobiles, which is effectively a form of financing.

In the recession, that proportion of newly leased cars and trucks fell from around 20 percent to under 10 percent. That is now back up to 2008 levels of 20 percent, according to Polk.

Eventually, the pent-up demand effect must, by definition, end. Rates are more likely to go up in the future than down, though exactly when is a subject for Federal Reserve watchers to ponder. And, even if lending standards don’t tighten up anytime soon, they can--and should--only loosen to the point where sensible loans are being made.

In other words, it’s great that autos is coming back. But we also probably shouldn’t count on it as the driver of America’s economic future.

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