By Peter G Hall, Vice President and Chief Economist
America’s love affair with the automobile is legendary. That was obvious in pre-crisis days, when there was hardly enough garage space in the land to house the horde of new purchases. But then recession brought on money troubles, and in its wake, a rare rift. Suddenly, the matchmakers – the auto manufacturers – were on life support, and the prognosis wasn’t good. They were revived, but demand for their services seemed permanently lower. That is, until the past couple of years. That ol’ heartthrob is back. But given all that Americans have been through, is it the real thing, or just a fleeting nostalgic fancy?
Let’s put it in numbers. U.S. auto sales roared to the 16 million-unit level for a good few years at the end of the last growth cycle. The average age of vehicles on the road plunged, and the number of vehicles per driver hit an all-time high – clear signs of excess. Things started to wane in early 2008, but by year-end, there was serious trouble. Unit sales had plunged to 10 million, and that wasn’t the worst – a few months later, they were down a million more units, and they were in no immediate hurry to revive. Debt-laden Americans were more intent on getting their books in order. There were spurts of growth that followed, but they proved to be short-lived. In all, it was a slow, steady climb. But steady it was; annualized light vehicle sales are now holding firm at well over 16 million units. Is this the excess years all over again, or is today’s situation more sustainable?
Like before, the current pace will eventually result in an oversupply – but that’s still a few years away. The average age of vehicles on the road in the U.S. is still very high, so there’s clearly appetite for a few years of strong sales yet. Moreover, in the current cycle, consumers are just getting going. Their debts are now much more manageable, and the picture is improving daily. Job growth is strong, and the unemployment rate is plunging. Real wages are beginning to rise, and confidence is back. What’s more, consumers are getting a $100 billion bonus from lower oil prices. They may be hesitant with certain purchases, but the four-wheeled fave isn’t one of them.
It’s not just consumers, though. Businesses have spent the last few years hoarding their cash, and they’re now starting to shell out for new vehicles. Pickup truck sales are up 10 per cent year-to-year over the past four months. Heavy trucks are also doing well – they have risen 22 per cent on the same basis, and they remain on a red-hot up-trend. Recall that heavy trucks were a trusted leading indicator for former Fed Chair Alan Greenspan.
Vehicle sales are indeed one of the most promising current signals in the U.S. economy. And it has defied the gloomy prognostications of many who claimed that sales would be permanently lower. They claimed that higher quality meant that vehicles were lasting longer; that millennials were less prone to own; that environmental concerns were quelling the car craze; and that hitting the debt wall was a shock-treatment with permanent effects on U.S. households. While these factors have not held sales back, they are serious issues that may indeed affect future sales. But at least for the moment, the industry is back, and in a dramatic way that many thought was impossible.
Canada is benefiting from the boom. Producers north of the border are suddenly ramping up capacity following a long investment hibernation. In the past year, there have been major announcements at Ford, Fiat-Chrysler, Toyota, Honda, Tier-1 supplier Linamar and others. Extremely tight production capacity stateside suggests that there may be more Canadian investment in the works. Sales suggest the same. Exports of light vehicles are surging, up 10 per cent thus far in 2015, and the trend isn’t abating. Truck exports are searing, up 37 per cent, and the parts industry is also busy, with exports up 15 per cent. With U.S. sales potential still strong, Canada’s enviable challenge will be keeping ahead of this Southern surge.
The bottom line? Analysts who concluded that the unthinkable split between Americans and their beloved cars was a full-blown divorce were wrong. The love affair is as strong as it ever was, without a hint of ‘new normal’ in it. If this also proves true for sectors of the economy well beyond autos, then the world is in for a pretty nice upward surprise in the coming months.
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