What's Driving the Auto Boom?
By Michael Mandel
I was wrong. When the New Economy boom came to an end in early 2000, I was sure that Americans were going to cut back on their consumption of high-price "nonessentials" such as Starbucks coffee. In fact, Starbucks (SBUX ) has done just fine, thank you, with revenues more than doubling since 2000.
Even more surprising, however, has been Americans' continued willingness to keep buying cars, SUVs, and minivans. Since the stock market peaked, U.S. consumers have purchased about 70 million new "light vehicles." That's despite terrorist attacks, wars, stock market crashes, recessions, high unemployment, threats of outsourcing, and all the other sources of economic uncertainty and fear.
And even with all the latest warnings about the softness of the economy, the new-vehicle craze continues unabated. The annual rate of sales in July hit 17.2 million, as reported by the auto makers. In the second quarter, sales were running at a 16.6 million annual pace, according to the latest data from the Bureau of Economic Analysis. That marks the 23rd straight quarter above the 16 million mark. To put that in perspective, from 1978 to the middle of 1998, only two quarters were above the 16 million rate.
All this buying raises the distressing possibility that the U.S. may be in the later stages of a stealth "auto bubble." While everyone has been worrying about the run-up in housing, little attention has been paid to the fact that Americans have been even more enthusiastic about building up their vehicular assets. According to the government's latest figures, from 1997 to 2002, the value, adjusted for inflation, of vehicles owned by households -- taking into account their size, age, and features -- rose by 42%.
By contrast, over the same period, the stock of residential housing -- the number of homes, taking into account their size, quality, and amenities -- rose by only 15%. And while housing may have caught up some in the past couple of years, there's little doubt that most Americans find it easier to expand the number of vehicles they own than the number of residences.
To put that in more concrete terms: I live in the same house as I did in 1997, so that even though its price has gone up, I still own the same amount of residential housing. However, I owned only one vehicle then (a minivan). Today, I own two (a minivan and a compact car), boosting my vehicle assets by roughly 50%.
END OF AN ERA?
Sure, plenty of good economic reasons can explain the rise in vehicle purchases. Real wages rose in the second half of the 1990s and continued doing so until the end of 2003. Vehicle prices, as measured by the Bureau of Labor Statistics (BLS), have dropped by 5% since 1997. Tax cuts and mortgage refinancing put lots of money into consumer pockets. And perhaps most important, low interest rates made loans and leases more affordable, and made it possible for auto makers to offer big rebates.
Unfortunately, several factors that sustained the auto bubble are coming to an end. Real wages haven't risen over the past year. Interest rates are starting their inexorable climb upward, which will make zero-interest loans a thing of the past. Auto insurance premiums are rising, according to the BLS. Higher oil and gas prices also make owning a vehicle more expensive -- plus there's the shock of paying $30 to $40 to fill up your tank.
The end of an auto bubble would be painful in different ways than the popping of a housing bubble -- if one exists (see BW Online, 8/18/04, "Is It a Bubble If It Never Pops?"). The effects of a sharp drop in housing prices would ripple first through the financial markets, particularly the mortgage markets. By contrast, a slump in vehicle sales would hit growth and jobs first. Indeed, for all the brouhaha about the Information Economy, more than 3 million people are still involved in making or selling motor vehicles and parts, and many of their jobs are relatively well-paid ones.
Still, some things could soften the impact if the auto bubble burst. For one, the U.S. is running roughly a $140 billion trade deficit in automotive vehicles and parts, so some of the pain of an auto slowdown would be distributed globally. In addition, vehicles depreciate much faster than homes, so people would have to return to the car market sooner rather than later.
And it's entirely possible that the vehicle boom may be nowhere near an end. Over the past seven years, the U.S economy has had a mammoth productivity bonanza. As a result of faster-than-expected productivity growth since 1997, real output is about 7% -- or roughly $700 billion -- higher. And it looks like a significant chunk of those gains are going toward SUVs and other vehicles.
Now, I believe in consumer sovereignty as much as the next person. And if I had the spare cash to buy a little red sports car now, I would. Still, it's fairly astounding that one of the net results of the Information Revolution is to enable Americans to put another Ford (F ) Explorer or Toyota (TM ) Camry in their driveway. An odd world, indeed.
Mandel is BusinessWeek's chief economist
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