What's Really Driving the Economy
Cardiff Garcia of the Financial Times pointed out a peculiar number a few weeks ago: "Vehicle purchases by consumers alone accounted for 30% of all the GDP growth in the last two quarters."
Focus on the most recent quarter and it's even more skewed. The economy grew 1.9% in the first quarter. Of that, "motor vehicle output added 1.12 percentage points," according to the Bureau of Economic Analysis.
Auto sales are what's really driving the economy. There are a couple of important takeaways from that.
First, this isn't surprising when you think about it. Housing construction is flat on its back. Business investment growth is still faint. Net exports, as usually is the case, have been a drag on growth lately. Same with government spending, which is falling at the both the state and federal level. Auto's share of economic growth looks impressive partly because there's little competition from other contributors.
Mind you, the recovery in auto sales is nothing to sneeze at. From an annual rate of about 9 million in 2009, vehicle sales popped to an annual rate of more than 15 million earlier this year:
Source: Federal Reserve.
But what's bullish about this is that it's not hard to make the case that sales still have a lot of room to grow. As Brad Plumer of The Washington Post writes:
[A]uto sales this year are still expected to be way below the long-term average for the 2000s. (About 14.5 million units vs. 16.6 million.) Unless Americans are planning to give up driving en masse, that suggests there are still a whole lot of vehicles out there that are rapidly aging and eventually need to be replaced.
That last part is really important. According to auto research firm R.L. Polk, the average car on the road today is 10.8 years old -- an all-time high, and two years older than just a decade ago. As the recession ravaged households' finances, people squeezed as much life as possible out of their old cars (which has been a boon for auto-parts companies like AutoZone (NYS: AZO) and Advance Auto Parts (NYS: AAP) ).
But that's unsustainable. Until just recently, auto sales were below the average scrappage rate, meaning more cars were being taken off the road than new ones being sold. With auto financing coming back, pent-up demand to replace clunkers is now bursting through. As Mesirow Financial chief economist Diane Swonk told me in an interview last year:
Pent up demand for vehicles is very high, and it is one of the few places that they got a waiver on the consumer protection laws, so it's almost easier to get a subprime vehicle loan than it is to get a subprime credit card. You may not be able to get a mortgage, but you can buy a vehicle and live in your car, which is unfortunately what some people are doing. I think it is important to understand that this industry has been scrapping vehicles faster than we have been buying them for more than four years. The pent up demand is enormous, and there is financing available, and it's one of the places where we are starting to see some movement again, and that's positive for the U.S. economy.
There's another more subtle point here that some might be overlooking. Four years ago, high gas prices clobbered consumer spending, including (or especially) auto sales. A case can be made that it's the opposite today. Household debt has dropped dramatically since 2008, with debt payments as a percentage of disposable income falling from an all-time high to an 18-year low. Now that buyers have much more financial flexibility than they did four years ago, high gas prices might actually be boosting auto sales as fleets of high-MPG cars from Ford (NYS: F) , General Motors (NYS: GM) , and Toyota (NYS: TM) hit the market. Sticker shock at the pump used to be an excuse to cancel a road trip. Today it's an excuse to buy a Prius.
"I watched Detroit rise like a phoenix from its own ashes more than once," Swonk said. "The auto industry's coming back right now; we are seeing it having ripple effects, and that is a positive thing." We'll take all we can get these days.
At the time this article was published Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Ford Motor. Motley Fool newsletter services have recommended buying shares of General Motors and Ford Motor. Motley Fool newsletter services have recommended creating a synthetic long position in Ford Motor. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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