The American consumer’s love affair with the automobile has been helping to keep another recession at bay. That help may be running out.
After a spring slowdown following a devastating earthquake in Japan, U.S. cars sales bounced back strongly in September. Despite stagnant wages, high gasoline prices and weakening confidence about their financial futures, buyers snapped up more cars and light trucks after automakers boosted inventories to make up for production lost to the Japan quake.
Chrysler had its best month since 2007. GM, world’s biggest car maker, said sales of full-sized pickup trucks and SUVs surged 34 percent. That category was helped by small businesses returning to showrooms to replace worn-out vehicles, according to Don Johnson, GM’s vice president for U.S. sales.
“It’s good to see the small business owner behaving as we expect them to do, which is a good sign for some of the underlying strength in the economy as we go forward,” he said.
But does the sales rebound reflects consumers’ willingness to spend? Or is it just the need to replace aging vehicles? The current pace of sales, at around 13 million, is still well below the average pace of nearly 17 million vehicles a year before the recession, which sent sales plunging to the lowest levels since the early 1980s, bottoming at 10.4 million in 2009.
That sales drought pushed the average age of a U.S. car to 11 years, the highest in decades. Now, the current sales pace is not much higher than the “scrappage rate,” according to Goldman Sachs. Consumers may have no choice by to buy a new car.
With the U.S. economic recovery hanging by a thread, the manufacturing sector is providing one of the key defenses holding back another recession. In recent weeks, several key indicators of regional economic activity have pointed to a strong showing by the nation’s’ factories. Those reports were confirmed Monday by a widely–watched index of manufacturing activity, which rose faster than expected September. The monthly index has been rising steadily since the recession ended two years ago,
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“The data lends credence to the idea that there is some strength in the economy, which is nice to see for a change,” said Randy Bateman, chief investment officers at Huntington Asset Management.
The data from the other corners of the U.S. economy aren’t as encouraging. Of the four main engines of growth and job creation, consumer spending on goods and services — at about 71 cents of every dollar of gross domestic product — is by far the biggest. Spending and investment by businesses represents about 12 cents of every GDP dollar
Since the recession of 2007 ended two years ago, those two categories have led the economic recovery. Now, there are a signs they are weakening again. Consumer sentiment remains at recession levels, largely because unemployment remains high. Wages for those who still have jobs are flat or falling. Those out of work for more than two years are losing their unemployment benefits.
Workers who still have jobs are losing ground to higher prices; adjusted for inflation, wages are falling. Consumers are tapped out.
Businesses have also been slowing their spending. Last year, business investment contributed roughly half of the 4 percent advance in GDP for the year. That pace has slowed to about 0.6 percent in the first half.
Government spending, which accounted for 20 percent of GDP last year, is now headed in reverse. As state and local governments continue to slash spending, the federal government is now poised to begin making deep budget cuts. Even before those cuts take hold, slower federal spending knocked 7-percent percent from GCP in the first half.
That’s why manufacturing remains the last best hope for keeping the economy moving ahead, and why a healthy boost in car sales provides fresh hope that a rebound in Detroit may help offset the weakness gripping the rest of the economy. But even if the boom in car sales continues, the impact on the overall economy will be relatively muted. At the current pace, car sales represent less than 3 percent of U.S. GDP.
Beyond the boom in vehicle sales, there are signs that the growth in other factory-made goods may be falling.
Manufacturing, which contributed nearly a full point to GDP in the first half of 2010, has fallen to about half that pace in the first half of this year. The latest report from the Institute for Supply Management, while offering upbeat readings about current activity, held some ominous signs for the future. Order backlogs fell sharply and orders for new goods remained below the current pace of production.
“This suggests a slower pace of manufacturing activity,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets. “We should all be braced for that. (But) it’s not pointing toward a recession at this point.”
That assessment is shared by most private economists, who are currently forecasting continued very weak growth and no recession. But they’ve been steadily paring back their forecasts in the past few months, and pointing to increased odds of the economy slipping back into reverse. On Friday, Goldman Sachs economist warned that the odds of a recession “are a high and rising.”
Some economists, including those at the independent Economic Cycle Research Institute, believe the U.S. economy is now tipping into a new recession, and that there is little the government can do to prevent it. The worry is that with unemployment already high and consumers still paying down large debts, the second half of the “double dip” could be worse than the first.
“It’s important to understand that recession doesn’t mean a bad economy — we’ve had that for years now,” the ECRI said in a recent report. “It means an economy that keeps worsening, because it’s locked into a vicious cycle. It means that the jobless rate, already above 9 percent, will go much higher, and the federal budget deficit, already above a trillion dollars, will soar.”
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