If you had to point to one culprit holding back the economy over the past 18 months, it would be the auto industry. Supply chain problems like the shortage of semiconductors have contributed to weak economic growth, anemic productivity, rising prices and higher interest rates as the Federal Reserve struggles to control inflation.
While the auto industry still is a long way from normal, the data we’ve gotten over the past month suggests it is finally healing, which is going to lead to some surprisingly good economic numbers over the next few quarters. We’re already seeing economic growth accelerate at the same time inflation is coming down.
The chart of seasonally adjusted automobile sales shows how far from normal the industry has been since the onset of the pandemic. In the years leading up to the pandemic, new vehicle sales were consistently in the range of 17 million a year. They plunged in March 2020, recovered later that year into early 2021, but then fell sharply by summer as the semiconductor shortage led to fewer vehicles available to sell. Since July 2021, sales have run at a rate of around 14 million a year, three million below what one might expect.
That deficit has affected the economy in all sorts of ways. Automobiles detracted 2% from real gross domestic product growth in the third quarter of 2021 due to the sales slump, and as of the third quarter of 2022 has yet to bounce back. The industry’s problems have hurt productivity growth due to the way productivity is calculated — vehicles that would sell for tens of thousands of dollars aren’t counted as output because they’re sitting on factory floors waiting for chips that often don’t cost very much.
And the impact on inflation has been profound. A lack of vehicle production pushed up prices for new and used vehicles alike — when dealers don’t have much to sell they don’t have to offer discounts to buyers, and a lack of inventory forces buyers into the used-vehicle market which pushes up prices as well. Those two categories account for 10% of the weighting in the core measure of the Consumer Price Index inflation report.
And those aren’t even the only categories hit by the shortage. Motor vehicle maintenance costs have surged as the lack of vehicles for sale has forced consumers to hold onto older, malfunctioning vehicles longer than they would like, keeping mechanics busy as a time when that industry is dealing with labor shortages. And when it costs more and takes longer to fix vehicles, that costs auto insurers more money, who then pass those costs onto policyholders. Inflation for those two categories, which account for another 4.5% of the core CPI basket, has been more than 10% over the past year.
All of those downstream effects mean that it’s a big deal for the economy that production is finally normalizing. Earlier this month we learned that new vehicle sales in October jumped to 14.9 million (at a seasonally adjusted annual rate) from 13.5 million, the highest level since January. That’s still well below the pre-pandemic normal, but it’s huge for measures of output like GDP.
That’s because if automobile sales in November and December merely keep pace with October’s rate, it will translate to a 10% quarterly jump. And for the purposes of the calculation of GDP growth we annualize that figure — 10% annualized is almost 50%. With automobile sales representing about 3% of GDP, that alone would contribute between 1% and 1.5% to GDP growth this quarter. And sure enough, when the GDP growth tracker that the Federal Reserve Bank of Atlanta puts out included that October vehicle sales report, its estimate of fourth-quarter GDP growth increased by 1.2%.
In large part because of the boost from auto sales, the Atlanta Fed says fourth-quarter real GDP growth is currently tracking at 4%. That may come down as we get new data, but it also suggests the fourth quarter might end up producing the fastest GDP growth of the year.
This would also be good news for productivity growth, which has been weak for a while. Faster economic growth without a corresponding pickup in the labor market means that productivity accounts for the difference.
Most importantly, the normalizing of auto production and inventories takes pressure off inflation. Used-vehicle prices are now falling. The growth rate in new vehicle prices has slowed as customers have a little more inventory to choose from. Hopefully that will lead to less pressure on vehicle maintenance and insurance prices. And lower inflation allows the Fed to relax a bit — Thursday’s soft CPI report led to a stock market surge and a sharp decline in mortgage rates, relieving a little of the pressure on the housing market.
This boost from autos couldn’t be coming at a better time. The housing industry has been crippled by high mortgage rates, and layoffs and hiring freezes in Silicon Valley have picked up as investors demand better cost control from tech companies. The normalization of auto production and sales could power the economy through the middle of 2023.
There’s still room to go, but the auto industry is the best reason to hope for an economic growth and inflation surprise over the next several months.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Conor Sen is a Bloomberg Opinion columnist. He is founder of Peachtree Creek Investments and may have a stake in the areas he writes about.
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