By on August 21, 2014

Autos3I’m an economist, and do more than think about the industrial organization (IO: “structure, strategy, conduct and performance”) of the auto industry. Here I present overall employment data and then focus on the automotive component. For a recent item on inflation and interest rates see here at my blogspot blog, Autos and Economics.

We’re now in the 6th year since the bottom fell out of the economy in 2008. Since then we’ve had monetary policy that in past environments would be considered strong stimulus. However, with no inflation, zero interest rates don’t do much, and with lots of people underwater on their mortgages – almost everyone is upside-down on their car loan, particularly as we now see 96-month-terms – well, it is powerless. Then there’s the fiscal front. State and local governments have cut employment, and that’s important, because public schools are far bigger employers than the federal government (if government is a leviathan, then it’s children who feed it!). At the Federal level we had a modest stimulus package in 2009 with the ARRA, but it was smaller than cutbacks at the state and local level, and since then federal employment is also down. So when push comes to shove, Washington believes in keeping its hands off of the economy.

So how have we done? Here are 3 graphs that tell the overall story. (Click on them to enlarge so that you can see the details. Read the text if you believe I can convey the essence of three pictures in less than 1,000 words.)

longrun performance TrendvsCensus

First, when we look at the US economy over the long haul, the Great Recession stands out against all of the post-1948 era for which good-quality employment data are available. Second, the onset of the recession was very sharp, and the recovery muted relative to underlying population growth. That’s true even when I correct for baby-boomer retirements. (As a college teacher, I see thateven good students from my nationally top-15-ranked school have great difficulty in finding jobs.) Third, there’s the speed of recovery. Now my correction for baby boomer retirements suggests that we don’t need as strong job growth as in the past to keep up with population growth, but at present we’re still roughly 7.7 million shy of where ought to be. (We’re 9.2 million shy if we factor in the large number who are working part-time because they can’t find full-time jobs.) So as a true practitioner of the dismal science, looking forward suggests we won’t really be back to normal for another 5 years, assuming of course that nothing goes wrong in the interim.

Why the slow adjustment? Those in the auto industry ought to understand the dynamics when the object at hand is a durable good. A boom leads to more cars in the total fleet – my own back-of-the-envelope calculations find that during the bubble years, the total fleet should have expanded by about 12 million vehicles, whereas it grew by 22 million (to 250 million in the US). That’s a 10 million unit overhang. Erasing that required years of depressed sales – for a while new vehicle sales were actually below the scrappage rate, and not just the population growth rate. (Cash-for-clunkers helped a bit, though most of the effect was to pull sales forward.)

However, cars are short-lived compared to houses, and so a much longer housing bust (and a bigger price swing) is required to offset a boom. That’s been accentuated by the low rate at which younger Americans have been able to launch their careers, so new household formation is down. (As an example, my son lived in our house until he was 29.) Now at some point that will normalize, as the excess inventory gets worked off. There’s the equivalent of clunkers, too, as housing built in unattractive locations are permanently abandoned and torn down. (It also takes people who are underwater on their mortgage longer to recover than people who are upside-down on their car loans.) At present, new residential construction remains half of peak. I could be wrong – I hope I am! – and housing price increases and employment growth will produce a virtuous circle with accelerating employment growth. Bets, anyone?

The good news is that in all this the auto industry has done pretty well. We had a gradual decline in industry jobs from 2000-2006, partly due to imports of parts and vehicles, and partly because of productivity increases, such that we simply needed fewer people. (That story holds for manufacturing on a global basis – while China employs a lot, output there has gone up even more, and their day of employment declines is close at hand.) Then came the Great Recession and employment collapsed, in retail and not just manufacturing.

Autos1For the past 4 years, however, the auto industry has been a bright spot, with job growth outpacing the overall recovery, adding 485,000 jobs. The industry picked up 0.3 percentage points of aggregate employment, and 535,000 if I add in employment at gas stations. Now make no mistake: prior to the Great Recession the motor vehicle sector accounted for 3.0 million jobs. We’re still 260,000 shy of that level, split between manufacturing and retail.

But there are jobs, and lots of new technology and new manufacturing processes to play with, and great product to market. And drive. All of us connected to the industry should be thankful.

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22 Comments on “How Did Autos Fare In The US Economic Recovery?...”

  • avatar

    Pretty interesting. I would argue that the notion of Baby Boomers leaving the workforce is not as substantial as some would think. My 68 year old mother still works full time – not because she needs the income, but because she just loves working and feeling productive. No plans to retire. I see the same thing in the industry in which I work (Aerospace.) To the 55+ crowd I work with, in a large sense job = self-identity = reason to exist.

    • 0 avatar

      I have to agree. I’m smack in the middle of the baby-boomer bell curve and I don’t see myself retiring for a long time. I like the money and I like the work.

    • 0 avatar

      At 62 I’m one of the few that I know is ready to retirement. Most don’t know what they will do if they didn’t go to work, and then add the financial burden of health care most are planning to just keep working.

  • avatar

    Refresh my memory, please. What occurred in midyear 1998 that caused that brief negative spike in manufacturing/auto employment?

    • 0 avatar

      Temporary government shutdown over budget dispute.

    • 0 avatar
      bumpy ii

      UAW strike at GM, resulted in about 500,000 lost units versus 1997 or 1999.

    • 0 avatar

      Wasn’t there a massive strike at GM during the summer of 1998?

    • 0 avatar

      Frozen credit stifled the economy, caused by the bursting of the real estate bubble which rendered mortgage backed securities valueless, as no one knew what they were worth.

      You can then ask who blocked the regulation of the credit default swaps, which enable Wall Street to compete with Fannie and Freddie, receive the coveted AAA rating, which allowed them to be sold around the world as investment grade. And when the music stopped, there were no reserves to pay the claims. Fancy that. Only the liquid net worth of the issuers, which was a drop in the bucket compared to the huge losses.

      BTW, F&F were victims, not perps and the CRA had nothing to do with any of this.

      • 0 avatar

        I agree.

        It should also be noted that traditionally, when a borrower falls behind, it makes good sense for the borrower and the lender to work out some form of loan extension or other restructuring. Even some principal reduction – the lender would rather have something than nothing.

        In the 2000’s, though, most of the mortgages were packaged and sold to groups of investors. Which meant that there was no “lender” for borrowers to negotiate with – only a trustee whose only authority was to initiate foreclosure. Which they did, triggering the tidal wave of foreclosures across the country.

    • 0 avatar

      There was also the Asian Financial Crisis, caused by a sudden currency collapse brought on by speculators. Took a whole lot of money out of the World Economy really, really fast.

  • avatar

    interesting and informative. So per the graphs, to “get back to normal” by 2019 would still require outperformance between now and then simply to catch up to where we should be, correct? Maybe this is what the markets see…so many people think it’s overvalued, we’re ready for correction, economy is still so weak, paper growth, etc. Maybe we’re in the midst of a long and moderate bull that actually has substantiation, but just isn’t as smack-dab obvious as many would like to see–or what they remember from the early-mid 2000’s which wasn’t normal in it’s own right.

    • 0 avatar

      I don’t think that regaining manufacturing employment is a helpful goal. Productivity improvements and automation mean that manufacturing employment is on a long term trend downwards.

      That’s not necessarily a bad thing for the economy, although obviously it means displacements at the personal level.

  • avatar

    Seat of the pants tells me dealers have seen less negative equity the last few years than has been typical. The pre-owned inventory shortage has so propped up wholesale prices that it has been easier to change cars. However, other forces are also at work and lenders have been more cautious from a Loan to Value (LTV) standpoint.

    I recently heard an economist make the base that this weak recovery means it will last longer with less chance of a bubble to burst in our face. Who knows, surely not me.

    For many of us working isn’t work. But we are certainly screwing up the employment numbers.

    One of the ways Japan shows such a good employment rate is they get people out of the workforce at an earlier age. With their labor shortage I expect more to stay in the workforce. I saw evidence of that a few years ago when my client there was hiring back retirees on a yearly contract basis.

    What do you think, Mike?

  • avatar

    And this is the kind of article I follow this site for. Thank you so much for expanding in this direction, directorial staff.

    Your graphs alone are insightful, the explanations given are but icing on the tasty cake (not Tastykakes, gross).

  • avatar
    Mike Smitka

    I don’t think I can post links, much less graphs, in a comment. If you want to see the details go to the Smitka-Ruggles Autos and Economics blog for a Jan 18, 2014 post “Two Further LF Graphs.” That provides the data on shifts in age-specific employment-population ratios.

    “Retirement” is for many a gradual process as they “slow down” and move to part-time or less intense work, and because leaving the labor force is not instantaneous at age 65. Yes, there’s less tendency to fully retire young. The shift however – you can get monthly data to track that across the Great Recession – is not enough to change the story, and I made sure that I didn’t use a base so far back in time as to skew my results. I’m happy to share the underlying excel files with anyone who’s a glutton for punishment!

    As it happens I’ve looked at similar data for Japan, and the one big contrast in labor markets is that people work until much older ages than in the US (and the US than most of Europe, though there’s lots of variation from country to country, and I don’t follow systematically enough to keep a spreadsheet). In the US 30% of the population is still in the labor force age 65-69, up from 20% in 1994. In Japan it’s 40% – flat the past 20 years but down from 50% in the late 1960s. I don’t have a gender breakdown for the US. For Japan, all of that decline is due to men in the 65-69 age bracket working less. In 1968 some 70% of men were working; that’s down to 50% today. About 30% of women were still working at age 65-69, with little change over 1968-2013.

    The biggest change in the US is at the young end – teens don’t work, from 50% in 1948 to 43% in 1994 to 26% in 2014, almost a 20 pct point drop over the past 20 years – and at the old end, where 10% worked age 70-72 in 1994, and almost 20% work today.

    Finally, the Great Recession had no aggregate impact on employment by older Americans: the ratio of employment to population was flat (age 50-54 and 55-59) or rising (age 60 and above), albeit the latter was modest. In contrast, employment fell by about 6% among prime-age (25-49) workers and by 12% for the age 20-24 bracket. It’s youth who have paid the price, and the experience of other countries that had mini-depressions is that all too many of them never succeed in launching a career. Let’s hope we have not given birth to a “lost generation” in the US.

  • avatar
    Big Al from Oz

    Mike, a very good read.

    I also think the US job market is changing more so than you put forward.

    There are many mature workers who have gone down a rung or two financially and don’t have the opportunities to rise again. There just isn’t the employment available.

    I have read much on the diminishing American middle class. Now is the time to introduce a decent minimum wage like we have in Australia.

    There is too much opposition to this in the US. The doubling of the minimum wage would increase the size of the American middle class.

    The fear is people will pay more for goods and services, which is true. But the benefits will outstrip the rise in the cost of goods and services.

    The benefit will be the current middle class income would also rise, but not proportionally with the minimum wage.

    • 0 avatar

      I very much agree with you. I don’t really care if my $1 McDouble now costs $2 so that the single Mom in the drive through window can make a decent wage. Or the cheap Chinese crap at Walmart costs a couple percent more.

      • 0 avatar

        I think you are an excellent advertisement for childfree living. It facilitates generosity.

      • 0 avatar
        Big Al from Oz

        I actually lean to the right. But we have seen the benefits of not creating a working poor class in our society reliant on handouts.

        I do see many comments on TTAC regarding welfare. Yet people complain about food stamps. Why? We don’t have food stamps.

        If a person works 40 hours a week and requires handouts to survive then there is something quite wrong.

        The welfare that government should target first is agri and industrial welfare. This needs to stop so industry can stand on it’s own two feet and become competitive. If something isn’t viable, then don’t do it.

        Then after businesses are able to stand on their own two feet, then tackle social welfare.

  • avatar

    I believe the auto industry is a classic “leading indicator” and that the middle class always lags the wealthy in recovery.

    • 0 avatar

      I believe that overall employment itself is generally considered to be a lagging factor in the economy, not a leading indicator.

      Assuming this to be the case, it supports your notion that the middle class (who rely on having a job) lag the wealthy (who are more typically the employers).

      Whether or not the auto industry is a leading indicator is something I do not know.

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