Auto Sales and Unemployment – The September employment report delivered an unemployment rate of 7.8% and the lowest since President Obama took office in January 2009. The recovery of the labour market from a deep recession is likely to remain at the heart of the election campaign with the President having to defend the slow-to-take-hold employment recovery. The following chart is therefore of interest to us because of the clearly strong relationship between the number of people working and demand for new cars. We thought we’d make some observations to contrast the slowdown that hit in the early ’90s to the current situation. Auto sales are clearly driven higher by declining rates of unemployment (inverted on the left scale).
Photo: Bloomberg, Business Insider
The Recession of the 1990s
We have tried to capture the key metrics in the table below in order to compare the relative slowdown in sales sparked by the recession and as the level of employment fell. The data shows that by the time the rate of unemployment turned in May 1990 the level of auto sales was running at a seasonally adjusted annualized rate of 13.9 million units. That is below the average pace of sales of 16 million units during the prior five-year period.
Photo: Miller Tabak
The chart above identifies the consequent cycle low when sales slumped to a pace of 10.4 million (-35%) compared to the pace of 13.3 million when the rate of unemployment peaked at 7.8% in June 1992. So it took 14 months between the reaction low and the point when joblessness later reached a peak. Sales had therefore recovered to within 16.9% of the five-year average after 14 months from the lowest point reached in the cycle.
We next look at the impact on auto sales given each percentage point decline in the rate of unemployment to estimate the impact of the thawing economy and recovery in consumer confidence. The Federal Reserve made its final cut in monetary policy in September 1992 to 3% and after the unemployment rate had peaked. It took 17 months through October 1993 for unemployment to fall by 1% from its peak by which time auto sales had reached 14.6 million. During the next 12 months auto sales rebounded by a further 1 million to 15.6 million as unemployment fell by another percentage point to 5.8%. It still took five more years before the run rate easily surpassed that earlier four-year average pace coincident with a decline in the unemployment rate to less than 5%.
The Great Financial Recession of 2007
The updated table shows a similar experience under the current recession shows that consumption returned strongly perhaps in part because the unfolding drama of the financial crisis took a shorter duration to hit home. Declining interest rates and rebounding confidence also helped play a role. While the outright level of the sales collapse was far more significant than during the recession of the 1990s, the preceding period was more than likely supported to no small degree by consumers tacking the cost of new cars to their mortgages as home values rose.
Photo: Miller Tabak
By April 2008 when unemployment began to inch higher, the average pace of auto sales during the preceding five-years was 16.5 million and so only a little larger than ahead of the experience of the ’90s. At the time sales had eased to a pace of 14.5 million. The Federal Reserve had run out of cutting room at least in terms of interest rates by December 2008 and was busy working on its alternative means. But two months later the pace of sales had slumped to the low for the cycle in February 2009 at 9 million as unemployment climbed to 7.8%. Seven months later the rate of unemployment reached its peak (although was projected to keep rising). At that time the level of sales in the auto industry had picked-up to a pace of 10.4 million units yet still 37% below the medium-term average pace ahead of the recession. Note that the seven month period between the February cycle low and the October 2009 peak in unemployment represented exactly half the period of time witnessed in the ’90s slowdown.
From its peak in October 2009 it took 16 months before the headline rate of unemployment would fall by 1%. That compares to 17 months through October 1993 for the medicine to show an impact. However, look at the table above to see that auto sales rebounded much stronger during this recession relative to the pace witnessed at the peak of unemployment.
Sales jumped by 2.4 million units as the unemployment rate fell to 9% compared to a 1.3 million jump back in 1993. On the one hand the recent experience shows that sales rebounded after a bigger decline, but on the other the rebound took place at a time when the rate of unemployment was far higher (220 basis points in fact – 9% in February 2011 versus 6.8% in 1993). Likewise the second percentage point decline in the rate of unemployment through September 2012 driving it to 7.8% has seen auto sales rebound by 1.7 million units to a pace of 14.5 million. And even though it took 19 months rather than 12 to erode a further point off the headline rate it stacks up against an increase of 1million more units back in 1994.
Why Have Auto Sales Recovered With Such Speed? – There are several reasons we can think of to help explain the recent stronger rebound. First, as noted earlier, sales fell sharply as the economy froze especially after the September 2008 bankruptcy of Lehman Brothers. And as the age of nation’s fleet rose to a high 11.5 years, consumers responded to record low financing costs. As the economy thawed fewer people could resist the chance to trade in old for new. There is also no stopping the rising demand for smaller and more fuel-efficient cars in the face of rising prices at the pump with low borrowing costs helping sway the minds of budget-conscious drivers.
Employment Statistics – The September household survey that caused the recent and unexpected slide in the unemployment rate was driven by news that 873,000 more people are thought to be working. The revisions to the household survey were the largest since 1983. That statistic compares to the establishment survey that showed 114,000 more people on payrolls in September. At the same time the BLS revised higher its payroll readings over the prior two months by 86,000. Based upon the recovering level of auto sales there has to be at least a chance that as the household survey suggests there are more people participating than thought in the recovery. We noted following the September data the rising level of self-employed persons, which had increased to a four-year high. The payroll data does not catch this part of the economy while the household survey does.
We have previously noted that overall consumption levels has shown far more resilience in terms of the economic rebound than did most metrics. Yet the level of auto sales is one indicator that points to a slow-to-recover consumer and it will be some time before the five-year average is recaptured. However, in aggregate consumers have been spending more since January 2011 than at the height of the consumer boom in June 2008.
Auto Industry Employment – Finally, we decided to take a look for clues surrounding the health of the auto industry within the employment statistics specific to the sector to see at first hand how sales and employment are related. The result possibly offers a strong clue about the overall nature of the payroll recovery, suggesting that US corporations are emerging leaner and fitter than ever from the recession. The problem remains one of lackluster employment as profits return in the absence of jobs.
Photo: Bloomberg, Business Insider
The chart above displays the annualized auto sales run rate and its clear return to a healthier 14.88 million units. We also added the number of workers across auto-manufacturing plants and auto showrooms in an effort to capture the total reading of employment across the industry. Having fallen to around 2.50 million at the height of the recession the number of workers back on the line or in car dealerships has risen to 3.18 million. Dividing sales by the level of employees offers us a glance at the per worker sales reading over time. Looking at this metric tells us almost immediately quite how efficiently the auto industry is operating.
The recovery to sales of 4.6 vehicles per employee is back in-line with the entire 2000-2007 period. During the recession sliding sales and a slower series of deep cuts caused the level of sales per employee to shrink to just 3 units. The boost to sales while accompanied by increasing employees makes the industry look very efficient.
Conclusion – Sales have recovered sharply but sadly it is taking too few workers to achieve the same level of sales as four years ago. While the sales force helps the industry win a gold medal for efficiency, it falls short in terms of hiring. But still, there is hope yet that employment trends might accelerate should the outright level of sales keep heading in the direction of that five-year average. But praying for this might prove a tall order if only because, as we noted earlier, it was undoubtedly inspired by a strong wealth effect nestled amid a housing boom. However, low interest rates will likely continue to provide strong support for sales going forward. One might hope that the auto industry will find deeper inspiration within the recovery to justify adding more labour to either end of the chain.
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