Don’t Look for Auto Sales to Give U.S. Economy a Much-Needed Boost
Despite a glimmer of hope in recent auto sales, they remain at dismally low levels. Furthermore, the recent announcement of major plant closings by General Motors Corp. underscores just how hard the recession in the United States hit the auto industry. From the beginning of the recession through January, unit auto sales slumped 16%. What’s worrisome, however, is that this severe slump in auto sales comes on top of a more long-term auto sales decline that actually began in 1986.
Some commentators believe that the very weakness of auto sales over the last five years is an indication that a pent-up demand for autos exists among U.S. consumers, and that when this pent-up demand is released--by implication in the near future--it will bolster what might otherwise be a somewhat lackluster recovery. A closer look at the situation, however, reveals that this may well not be the case.
Those expecting a surge in consumer demand for new autos point out that, at 7.8 years, the average age of passenger cars in use in the United States is now higher than at any point since the years immediately after World War II. Historically, the aging of the auto fleet between 1941 and 1946, when the average climbed to 9 years, indeed represented the accumulation of a pent-up demand during both the Depression and the subsequent war years, as consumption was held down and production diverted to armaments. It was followed by a period of booming auto sales and a rapid decline in the average age of the passenger car fleet, to a low of 5.6 years in the late 1950s, as consumption was unleashed and production reverted to civilian goods. But today’s situation is very different from that of the 1940s, and the age of the auto fleet may be a factor that is about to constrain rather than stimulate auto demand over the next few years.
The trend of an increasing average age of the U.S. auto fleet began after 1974. It is my contention that this aging of the fleet is a function of the quality improvements brought about by the onslaught of foreign, notably Japanese, competition since the 1970s. Japanese imports, which garnered 22.9% of the auto market by 1982, raised the standards of quality and durability expected of cars sold in the United States, forcing Detroit--albeit somewhat belatedly--to improve the quality and durability of their products too. Direct import penetration stopped growing in the early 1980s, essentially in response to informal U.S. protectionism. But this provided only a temporary breathing space from the Japanese onslaught for Detroit. In the mid-1980s, the Japanese began opening their “transplants,” Japanese car plants building cars in the United States. By 1991, cars built by Japanese companies captured 35.9% of the U.S. market.
At the same time, U.S. consumers embarked on an unprecedented borrowing and spending binge in the 1970s and 1980s--a binge that encompassed spending on new autos. Thus when compared to the 1975-’85 aging trend, the auto fleet is actually young, not old; the years since 1985 have seen no growth in the average age of the fleet, creating a fleet which is significantly younger than the trend would have predicted. In other words, the “pent-up auto demand” thesis may be a myth.
Other factors will prevent a surge in consumer demand for new autos. The “fat years” of the profligate 1980s are over, and the leaner 1990s are upon us: Paying off debt that is the legacy of the 1980s will inhibit auto sales in the 1990s. As a result, the average age of the auto fleet will rise back toward its trend level. Indeed, given the amount of debt that must be paid down by consumers even makes it conceivable that the average age could rise above its trend line.
Furthermore, in the 1980s, car prices rose faster than earnings, making cars less affordable. The number of weeks of median family earnings required to meet the price of the average new car rose from 18.7 weeks in 1980 to an estimated 24.5 weeks in 1991. Auto loans were then lengthened from an average 44 month maturity to 55 months to ease the pain of repayment for consumers, but this in turn had prompted many car owners to hold on to their autos longer, and pushed others, who took on too much debt relative to the value of their cars, out of the new car market altogether. What’s more, the maturity of the average auto loan, standing at almost five years, cannot realistically be further extended. For many consumers with these elongated loans, when the time came to replace their car, they found that they owed more on the loan than their car was actually worth--also known as an “upside-down” loan.
And finally, the changing nature of the real estate market will have a negative impact on car sales. Home equity loans--what I like to call the “15-year auto loan”--were another method used by consumers to pay for new cars when their income alone could no longer provide sufficient funds. Not only could they pay the loan off over a longer period than a conventional auto loan, but the interest paid was tax deductible. For the most part, debt-strapped homeowners have essentially tapped out this alternate source of funds. Between 1981 and 1990, the portion of their home that homeowners actually own dropped from 64% to 42%.
Thus, a relatively young, not old, auto fleet, coupled with these demand-depressing factors make a significant boost in auto sales highly unlikely. The absence of a strong pickup in the auto industry--which, although only 3.8% of gross domestic product, has accounted for an average 14.1% of GDP growth during previous postwar recoveries--makes up one more weak link in the economy, increasing the likelihood that at best, the U.S. economy faces a prolonged period of anemic growth.
