As worries about a US or even global recession have emerged over the past 12-18 months, Wall Street analysts economic pundits, and fretful economists have been looking for data that might suggest a downturn is coming.
That data is hard to come by. The US unemployment rate is at a 50-year low, 3.6% in May, a level at which economists would characterize the country as being at full employment and start fretting instead about inflation driven by a tight labor market increasing wages.
The S&P index is up 15% year-to-date, after enduring a swoon earlier in 2019. The stock market isn't the economy, but as a proxy for economic confidence, is pointing in a positive direction. Finance wonks briefly turned their attention to the legendary "inverted yield curve," often seen as a the harbinger of bad times, but there was no guarantee that the inversion of short- and long-term bond yields from their typical pattern is a signal of anything.
Enter the auto market. After cratering in the US following the financial crisis, auto sales have run at record levels for the past four years. It was looking like 2019 might finally see a retreat below the 17-million mark. But with just about two selling months remaining in 2019, the sales pace suggests another year at or slightly above 17 million.
That hasn't made the auto market any less attractive for recession prophets. Cars cost a lot of money, they're usually financed, and the big car companies employ — and lay off — lots of people. The industry mashes up plenty of juicy data points; when it really is tanking, it usually means the rest of the economy is in bad shape.
The latest bout of concern about the auto industry, globally, comes from the International Monetary Fund's World Economic Survey, released in October. The publication points to a choppy auto market outside US, notes that declines in markets such as China and a flatlined Europe are negatively affecting growth, and then reviews all the usual suspects that could weight on the industry, ranging from stricter emissions regulations to ride-sharing to electrification costs.
"Peak car" is an oversold idea
I covered the car business during and after the financial crisis, but I was also around for a few recessions/business-cycle downturns. The Great Recession was scary: General Motors and Chrysler went bankrupt, Ford was on the verge of failing, and annual US sales fell to 10 million, the worst market most folks had ever seen.
The routine downturns, meanwhile, were absorbed. GM and Ford have each been around for over 100 years; they've ridden out many recessions, not to mention two world wars and the Great Recession.
So what about "peak car." This is the notion that worldwide auto sales growth has topped out and will fall in the future. Flashy new Silicon Valley businesses, such as Uber and Lyft, are pointed to as evidence that fewer people will need to own cars in the future, and that this "de-ownership" trend will undermine if not destroy new-vehicle markets.
Some of the peak car discussion is founded in a misconception. When Wall Street talks about auto sales peaking, it means peaking in a cyclical sense (more on that in a minute). Auto sales are cyclical, rising and falling over time. Because the Great Recession's impact was so severe, US auto sales ran below the so-called "replacement rate" of 15 million for a time, then bounced back to a healthy range before an aging US vehicle fleet and and improving economy sent annual sales up to 17 million and above, starting in 2015.
Globally, regional markets have their own dynamics. The Chinese market has seen crazy sales growth, making it by far the world's biggest, with 28 million vehicles sold in 2018. Latin America, meanwhile, has been troubled, while Europe has been flat. Often, the sales patterns in, say, the US and Latin America are countercyclical, as the US credit cycle turns in opposition to commodities. That provides the GMs and Fords with a way to make money globally when they experience a downturn at home.
Sales ultimately matter less than profits
There's also some confusion around what lower sales and lower overall auto production means for car makers. In this respect, the only two markets that matter are the US and China. Europe is a big market, but it's also a weird one, full of small cars that auto companies don't make much money on.
In the US, it doesn't matter if you're selling fewer cars, as long as you're earning substantial profits on the ones you do sell. At the moment, the market is running hotand transaction prices are around $35,000 per vehicle, which is historically high. That combination has enabled Ford, GM, and Fiat Chrysler to build up war chests. Ford has enough cash to ride out a couple of Great Recessions and numerous run-of-the-mill downturns.
Mind you, if the US market fell below 15 million for an annual sales pace, that would be a problem. But that would also mean a true recession had kicked in. But nobody thinks that will happen. GM is actually organized to be profitable if sales fall to 11 million annually, but a more realistic scenario is a decline to the 16-16.5-million mark.
China is concerning because growth there has boosted Western car makers' profits, and that era of expansion could be ending. But a more affluent China long-term means a dynamic that looks more like the US, with volume being replaced by higher sticker prices — and the attendant higher profits.
In order to understand why "peak car" isn't happening, I generally point to one chart, taken from the St. Louis Federal Reserve's wealth of economic data and showing US auto sales since the 1970s. Before we walk through, I'll concede that the US market isn't the world; different markets have different dynamics. But the US is a model market, one that less-evolved markets could end up matching.
OK, let's walk through the chart:
This is US auto sales since the mid-1970s. As you can see, since the mid-1980s, when the current competitive makeup of the US market took shape, yearly sales have hovered around a 15-to-17-million level.
The US market has tanked twice in the modern period: during the early 1990s, when the first Gulf War provoked an oil-price shock; and during the Great Recession, when the credit that fuels the auto market was obliterated.
The dot-com meltdown, unlike the oil shock of the early 1990s, didn't knock much off US GDP and was localized in the tech economy, so auto sales didn't dip by much.
After the recovery of the 2000s began, auto sales settled to a 16-17-million annual range that lasted for almost a decade.
Now, look at the Great Recession. Sales hadn't fallen that far in the US since the early 1980s. And back then, peak sales levels where lower.
Since 2015, US auto sales have been posting record or near-record annual totals above 17 million.
As we've seen from the previous period of sustained high annual sales in the 2000s, the US market can maintain a sales plateau for a long time. This is what the peak of the cycle actually looks like: high sales clustered around a standout year.
If you look at the tail-end of the US sales chart, you see the same clustering from 2015 on. You also see less volatility than in the 2000s pattern, suggesting a smoother market overall.
When all around you there are people saying the car business is being disrupted, that electric vehicles are coming to eat the gas-powered automobiles' lunch, and that Uber and Lyft will destroy traditional car ownership, it can be easy to overlook the basic fact that US auto sales are strong, have been strong, and should be relatively strong in the future.
Something like 85 million vehicles will have been sold in the US in the past five years by the end of 2019.
The consensus in the auto industry these days is that we're in something of a sales plateau, at historically high levels. Pretty reliably over the past two years, whenever it's looked as though US sales might slip below a 17-million pace, they've recovered.
It would be strange if this level holds up for several more years. My own view has been that 2019 should see the US market dip below 17 million, but I also think it's possible that through 2020, sales could settle into a mid-to-high-16-million range. The biggest wild cards are gas prices — currently low — and the impact of the used-car market.
The latter has been cited as a concern for new-car sales, but it's important to remember that automakers know that if they sell and lease a lot of new vehicles, they'll have to deal with a larger used-car fleet eventually. It's all part of the cycle, and used cars can actually be a boon to dealers as they have vehicles to sell when consumers become more price-sensitive.
What genuinely worries me more that a run-of-the-mill cyclical downturn is some of the catastrophic rhetoric around auto sales. Yes, the last downturn was a humdinger. But it was also an unusual event, and the Great Recession came at the end of a challenging business period for the auto industry, when the business had been managed away from return on investment and was saddled with legacy costs.
We've almost forgotten what a mild erosion in sales looks like, and the amnesia has been exacerbated by all the so-called "disruption" of transportation, which on closer examination is no disruption at all. New ideas about how to provide mobility are emerging, but they're far from overturning the familiar paradigm.
It is true that globally, there are worrisome spots. But even though China's growth has slowed, with sales declining for the first time in decades, the auto market there is enormous and nowhere near mature, in terms of vehicle ownership, which lags far behind the US.
It's fair to argue that a very large auto industry, if it slows in a meaningful manner, could affect world economic growth in a negative way. But it doesn't make sense to jump from that to "peak car." After all, China sales are already 10 million units higher, annually, than in the US. That market could have another 10 million on the horizon.