The auto industry’s importance to the US economy is undisputed. From providing employment to millions of people to being a major driver of the economy’s manufacturing sector, car ownership has not only shaped the economy, but has long been a centerpiece of the American way of life. That was recognised when it became the only nonfinancial sector to receive a bailout during the 2007–09 financial crisis.1 But things are changing—and to understand the shift better, we examine three topics. First, we look at the evolution of the auto industry’s importance and standing in the national economy. Second, we outline the current challenges for the industry. Third, we explore the near-term prospects for the industry and highlight two key factors for recovery.
America’s love affair with cars created a boom in the post–World War II period. Vehicle ownership took off—between 1945 and 1954, the total number of registered vehicles nearly doubled from 31 million to 59 million.2 By the late 1960s, motor vehicle ownership reached 100 million. From drive-ins and drive-throughs to car meetups and rock and roll, autos became an integral part of the American way of life. No wonder then that motor vehicle output’s share in GDP peaked during this period, reaching 4.9% in Q1 1973 (figure 1).
This strong performance continued until the late 1970s. Car production and sales declined substantially during the recessions of early 1980s before rebounding mid-decade. However, auto output, both because demand in other sectors grew more rapidly and because of the rise in imported cars and parts, never regained its lost GDP share.3 By 1990, it accounted for just 3.3% of GDP. Figure 1 shows the gradual decline in motor vehicle output’s contribution to the economy. The recession of 2007–09 saw a record dip in auto output’s share in GDP. And, during the last recovery (2010–19) prior to the COVID-19 pandemic, the industry’s share of GDP was only about 60% of what it was in the late 1960s. But the industry still accounts for a significant share of manufacturing value-added in the economy, at nearly 7% (in 2020).
The auto industry is also known to be cyclical, as car purchases can be easily delayed when households and businesses are short of cash. Figure 2 shows that the industry typically experiences greater volatility during recessions than real GDP. On average, real motor vehicle output has fallen nearly 12 times more than real GDP during downturns.
The number of registered light vehicles per licenced driver first touched 1.0 in 1978, implying that Americans owned one car per licenced driver. This rate continued to grow until the peak of 1.15 in 2001. Since then, the vehicle-driver ratio has stalled (figure 3). And it’s not just vehicle ownership—vehicle miles travelled per driver have also declined since the recession of 2007–09 and remains below its 2004 peak. This suggests a decline in Americans’ attachment to their cars, trucks, vans, and SUVs over the last two decades. Another indicator of declining attachment is a decrease in the number of teenagers with driving licences (see the sidebar, “Cars: No longer a rite of passage for American teens?”).
If teenagers are any guide, cars appear to be losing their place in teen culture. Fewer young people, specifically teenagers (aged 16–19 years), are getting licences—the proportion of teens with a driver’s licence has declined significantly since its peak in 1983 (figure 4). In 2014, this share dropped to below 50%, meaning that fewer than one in two teenagers opted for a licence. A Pew Research study (2013) found that a driver’s license is no longer a symbol of freedom, nor does turning 16 require the traditional rite of passage of getting one’s driver’s licence.4
Prior to the COVID-19 pandemic, the share of teenagers with a licence was flat for nearly four years at just over 50% (between 2016 and 2019). While data for 2020 is yet to be released, we are likely to see a decline in the share as mobility restrictions in early 2020 led to a sharp decline in road travel, closure of motor vehicle departments issuing licences, and an increase in the number of people staying home, including teenagers.
Two key periods have shaped the impact of the pandemic on the auto industry. At first, consumers hunkered down due to fear of COVID-19, and demand for cars collapsed in a span of just two months. Light vehicle sales declined sharply from an annual rate of 17 million in February 2020 to 11 million in March, and then further down to 8.6 million in April. On the supply side, various businesses such as car dealerships, auto plants, and others shuttered to prevent the spread of the virus. Light vehicle production also screeched to a halt. In April 2020, production fell to nearly zero units, down from seven million units in March and 11 million units in February. Figure 5 reveals the sharp contraction in the production and sales of light vehicles between February and April 2020 (area shaded grey). The figure also shows the evolution of light vehicle sales and production starting 2019 (unshaded area). Prior to the pandemic, production lagged sales by 6.4 million units in 2019.
Second, substantial changes in the structure of consumer demand created a swift, but challenging recovery.5 Specifically, a broad shift in consumer demand from services to goods led to a faster-than-expected recovery in the demand for light vehicles in the second half of 2020. Car dealerships suddenly got a lot busier and the waitlist for new vehicles got longer. Light vehicle sales rose to near–prepandemic levels of 16.3 million units (at an annual rate) in September 2020. At the same time, auto producers and parts suppliers found it difficult to increase production due to just-in-time production principles and uncertainty in the availability of key parts.6 A relative shortage of semiconductors—an inexpensive but essential component of autos—exacerbated this production delay.7 With new cars unavailable, consumers turned to used cars and trucks, leading to a dramatic spike in used car prices.8
Despite the disruption in auto manufacturing, light vehicle production exceeded prepandemic levels in July 2020. The grey shaded area in figure 4 shows the V-shaped recovery in 2020—after sharp declines in April 2020, both sales and production rebounded to near–prepandemic levels between July and September 2020.
While 2020 was incredibly volatile and unprecedented for autos, the demand-production gap saw only a mild recovery in 2021 (green shaded area in figure 5). Consumer demand for autos rose in 2021 and light vehicle sales reached a multiyear high of 18.3 million in April. On the supply side, production was slightly lower than the prepandemic level. Overall production in 2021 lagged sales by 6.1 million, lower than the 6.4 million deficit in 2019. This shows that the major deficit in supply came from imports, rather than from domestic production. Imports of automotive vehicles and parts declined for three straight quarters between Q1 and Q3 2021. Light vehicle sales also declined for five straight months until September 2021, after peaking in April 2021. With fewer cars at dealerships, auto inventories continued to remain under intense pressure. In December 2021, domestic inventories were nearly depleted at 115,000 units—only 20% of the prepandemic level.
Supply chain pressures impacted the auto industry in distinct ways—production did not decline much, consumption fell more, and imports dipped. Thus, in the National Accounts, motor vehicle output declined less than spending on motor vehicles. The decline in real motor vehicle output in 2020 accounted for 0.4% of 2020 GDP. To put the potential impact on GDP in context, had the pandemic not occurred, and motor vehicle output not fallen, real GDP would have been 0.6 percentage points higher in 2021.
Meanwhile, the decline in light vehicle sales in 2020 accounted for 0.6% of total consumer spending in 2020. The potential implication of lower vehicle sales on consumer spending was higher—Had light vehicle sales clocked in at the 2019 annual rate of 17 million units in 2020 and 2021, consumer spending would have been US$150 billion higher, equivalent to 1% of consumer spending in 2021.
It’s still too early for automakers to shake off pandemic blues as vehicle sales and production continue to be constrained by low inventory and supply chain disruptions. According to forecasts by IHS Markit, light vehicle sales are expected to reach 15.5 million units in 2022, slightly higher than the 2021 level of 15.1 million units.9 Two factors are key to the industry’s near-term recovery.
First, the auto sector may continue to benefit from the shift in consumer spending patterns. Factors that contributed to the initial rebound in auto demand in 2020, such as the preference for personal vehicles as a safe mode of transportation, may boost demand.10 Lower borrowing rates provided additional incentives, but the winding down of economic support by the Federal Reserve and the expected rise in borrowing rates might hold demand back, although “pandemic savings” will lend some support to the existing pent-up demand.11
Second, while there are no quick fixes to supply chain disruptions, early indications suggest that supply chain problems are starting to abate. The Global Supply Chain Pressure Index, developed by the New York Federal Reserve, suggests that elevated global supply chain pressures may have peaked and might start to moderate going forward.12 Another gauge called the Ocean Timeliness indicator, which measures the timeline of a shipment starting from the exporter’s warehouse to its destination port, reported that shipping times from Asia to the Transpacific, while historically high, dipped by one day to 113 days.13 Other related indicators such as Taiwan’s surge in semiconductor exports (Taiwanese firms account for 92% of leading-edge semiconductor production) and a sizeable decline in the Baltic Dry Index in January 2022 also point to an improvement in the supply chain.14 Supply chain pressures may appear difficult, but it is precisely these types of problems that US manufacturers excel at solving.
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