A 4-Wheeled Look at the US Economy

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A 4-Wheeled Look at the US Economy

We’re on a bit of an auto industry kick today, so we’ll keep the theme going with Data:

#1: US auto sales as economic indicator. Few industries have the labor force multiplier effect of light vehicle manufacturing. Suppliers, manufacturers, transport companies, car dealers… All these rely on US consumers buying new cars and trucks. On the demand side of things, a new car or truck is the second largest outlay most households make. Since this is a deferrable purchase (ex a lease ending), strong light vehicle demand is a function both of consumers’ “ability to spend” (employment, wages) and “desire to spend” (economic confidence).

That’s why the following chart looks the way it does. You can basically tell the story of the American economy for the last 45 years by simply looking at how many light vehicles (cars, pickups, SUVs, minivans) were sold. We’ve highlighted the last cycle peak of a 17.9 million unit selling rate for August 2015 to give you a sense of scale.

Take a moment and compare the speed of the demand now (yellow section on left) to the sluggish improvement after the Financial Crisis or the 1979 and 1990 oil shocks.

Takeaway: January 2021’s selling rate of 16.6 mn units shows US consumer demand has largely recovered. Recently announced production cutbacks due to chip shortages may eventually curtail sales somewhat, but only after dealers run out of existing floorplan inventory.

#2: The US used car market is actually twice the size of the new car business and Manheim’s Used Vehicle Value Index remains very, very strong. Since the “supply” of used cars is notionally fixed, sudden changes in demand can change price quite quickly.

You can see 2 examples of that in the chart below: January 2009 and April 2020, when used vehicle prices tumbled. The first was a combination of the economic effects of the Financial Crisis and the related contraction of consumer credit to this market. The cause of the second collapse in prices was just as much a lack of data since car auctions were closed along with everything else going on back then.

Takeaway: used car prices lifted much more quickly post-pandemic than after any prior economic shock and remain extraordinarily elevated even now. This is good news because it both reflects confidence among the cohort of consumers who purchase used rather than new vehicles and also helps new vehicle sales by making trade-ins more valuable. Frankly, we’re stunned used vehicle prices have stayed this strong for this long. With potential production cutbacks for lower-end new cars due to the semiconductor shortage we mentioned in Point #1, we likely have not seen the end of the rally in used vehicle prices.

#3: Ever since the Financial Crisis we’ve looked at the US market for new full-sized pickup trucks as a proxy for small business confidence. Yes, plenty of retail consumers buy Chevy Silverados and Ford F-150s, but the marginal consumer is just as likely to be the local gardening shop, contractor, or oil field services company. This is not true of any other vehicle segment (large vans are not big sellers).

As the chart below shows, Q1 2009 was a bad time for the large pickup truck market, with sales down 45 percent from the prior year. Comps didn’t even turn positive until 2010.

In 2020, Q2 was the trough quarter (-22 percent from a year ago), and Q3 and Q4 were actually pretty flat against what was a decent 2H 2019 (down just 1-2 percent from prior year).

Takeaway: as with the used car price data, we’re quite surprised that new pickup sales rebounded so quickly in 2H 2020 and this tells a better story about American small business than we thought possible just a few months ago. Lower gasoline prices certainly helped things; these are not what you’d call high efficiency vehicles. And very few restaurants buy pickups, so we’re not capturing every sort of small business. But for those businesses that use these vehicles – and there are many – 2020 must have been an OK year after all.