Political and market change

Back in the driver’s seat

Dr. Jerry Webman, Ph.D., CFA, Chief Economist, OppenheimerFunds

Economists spend most of their time studying charts and graphs, arcane models and complex data series. Most of us also have some rather unscientific indicators we watch to keep all the data crunching in context. One of my favorites is a huge auto plant in north-central Illinois. I drive past it about once a year on my way to visit clients in the area. When I passed the plant a few years ago, I only saw security vehicles in the parking lot. When I drove by this past February, the lot was filled with workers' cars.

In February of 2009, Americans were buying cars at a nine million unit annual rate, down by over 40% from the 16.6 million we enjoyed a few years earlier. That decline in demand produced a corresponding decline in supply. In 2004, U.S. factories assembled a monthly annualized average of 11.6 million cars and light trucks; by 2009 production had fallen to 5.6 million.1 As we all know, that collapse led two iconic American brands to declare bankruptcy and reorganize under government supervision. We'll debate the wisdom of federal intervention for years to come, but what's undeniable is that the U.S. auto industry has recovered strongly. By late 2013, we were assembling vehicles at a 10.8 million unit rate and, including imported cars, emptying showrooms at a pace approaching the sales volumes of the mid-2000s.2

Reassuring as those recovery statistics may be, they do mask an important change across recent favorable trends in U.S. manufacturing. In 2004 the U.S. auto industry employed 1.2 million manufacturing workers. By 2013 despite the strong pickup in production, factory employment had only recovered to 911,785 workers: 269,446 fewer workers—269,446 fewer paychecks with which to stimulate the overall economy.3

Nevertheless production lines are rolling again, animating not only the traditional "rust belt" manufacturing centers but spurring the economies of newer car-making hubs especially in the South. Due to the auto-buying boom and bust of last decade, over 100 million cars on U.S. roads are over eight years old,4 and the average age is a record 11.4 years5. Whereas an AM/FM radio was once a luxury option, that plant in north-central Illinois now produces a $20,000 (cheaper than a Model T in 2014 dollars) car with a navigation system that seems to rival those in the Apollo program. Couple those demand drivers with the likelihood of persistently low financing rates and strong auto demand is likely to endure, reaching a projected 19 million units by 2020.6 The revival of the U.S. auto industry is one of the promising stories of the current business cycle, and though it alone will not solve our longer-term employment challenges, I expect to see crowded assembly plant parking lots for years to come.

1http://www.federalreserve.gov/datadownload/Download.aspx?rel=G17& series=3071ed5768de9e68e2d5a5815d3abe09&lastObs=&from=01/01/2000&



4Kevin Tynan, "Aging Vehicle Sweet Spot Drives More New Car Sales: Bull Case," Bloomberg, February 25, 2014.

5Kevin Tynan, "U.S. Keeps Cars Longer, Buys Used, Logs Fewer Miles: Bear Case," Bloomberg, November 7, 2013.

6"Global Vehicle Sales Revving at Multiple Speeds," Joseph F. Kalish, Ned Davis Research Group, March 14, 2014.

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