This week's encouraging earnings reports from the big U.S. car makers are more than just positive signs for the North American auto industry. They could rev up the entire back-firing economy.
The better-than-expected financial results from General Motors Co., Ford Motor Co. and Chrysler parent Fiat SpA shared a common trait: surging sales in North America. The results dovetail nicely with the latest U.S. auto statistics for September, which show new-vehicle sales jumping nearly 3 per cent in the month to their highest level since 2008. The numbers mark a significant watershed: For the first time since the Great Recession, the size of the U.S. vehicle fleet didn't shrink.
"The number of new vehicles being purchased is now higher than the number being scrapped," noted Paul Dales, senior U.S. economist at Capital Economics, in a report Wednesday.
The recession's deep economic downturn and massive job losses, exacerbated by the drying up of credit during the financial crisis, left a lot of car owners with little choice but to keep their long-in-the-tooth cars on the road, held together with chewing gum, duct tape and fervent prayer. Or consigning them to the scrapyard and buying a bus pass.
But now those clunkers are four years clunkier, and economic and credit conditions have improved. Growing numbers of consumers are finally trading in their heaps for something new. And the trend may just be getting started, Mr. Dales said.
"Given that new car prices have been stable and that auto loan financing rates have dropped to record lows, conditions appear to be in place for this pent-up demand to be released," he wrote.
While he doubts that the U.S. fleet will return to its pre-recession peak rate of 799 per 1,000 people (in 2007), he thinks that the historic rate from 1990-2012, of about 780 per 1,000 people, is "plausible." That, he said, would require adding another five million cars on the road – that's five million on top of the vehicles needed to simply replace those being scrapped, which has been running at more than 14 million a year.
If you spread that over, say, four years – roughly the same amount of time the fleet has been shrinking due to the recession – that would add about one-quarter of one per cent to U.S. gross domestic product annually. If the rebound in pent-up demand comes quicker – say, over the next two years – GDP could get a boost of a half a percentage point from auto sales alone, he said.
When GDP is growing at an annualized pace of less than 2 per cent, that's a substantial boost. It's also a welcome ray of hope on a decidedly cloudy economic horizon.
"The possibility of a surge in new vehicle sales is a rare upside risk to our forecast that GDP will rise by just 2 per cent next year," Mr. Dales concluded.
David Parkinson