The Independent Market Observer | Outlook. Opinion. Insight.

Another Reason for Sustained Recovery

Written by Brad McMillan, CFA®, CFP® | Jul 11, 2012 1:31:37 PM

We talked yesterday about housing. We discussed how it is bottoming, how it is poised—at some point—to start a recovery, and how that is a very good thing for the economy. It’s good for several reasons—largely because of the employment the sector generates and the multiplier effects it has on other areas of the economy.

Housing can be considered a durable good. Because it is a long-term asset that is purchased with financing, it reflects, to some extent, the buyer’s vision of the future. The stabilization and incipient improvement of this sector is also a sign that the U.S. population has started to recover psychologically from the crisis, which is an underappreciated element of what has to happen before recovery really kicks in.

Auto sales, another component of consumer demand, share several characteristics with housing. Like houses, but to a lesser degree, cars are long-lived assets that are lifestyle-dependent and purchased with financing. As a result, you should expect cars to experience the same trends in recovery, but because they are less expensive and depreciate more rapidly, the trends will be more pronounced in cars than in housing. If, that is, there really is a sustainable recovery under way.

Fortunately, when we look at the data, we do see just such a trend. Looking at the Wall Street Journal’s statistics page on auto sales, year-to-date car sales are generally up 15–20 percent over last year, and truck sales are up around 8–12 percent. On a longer-term basis, Bloomberg reports that auto sales have been around 14–15 million on a seasonally adjusted annual rate for 2012, reflecting an ongoing uptrend from lows of about 9 million in early 2009; this is also close to the 2008 peak of just over 16 million.

The multiyear recovery in auto sales is based on solid fundamentals. With about 250 million registered vehicles in the U.S., sales levels of 15 million imply an average age of 17 years. That’s pretty old, and it suggests that current levels are at least sustainable on a replacement-of-old-cars basis.

Like houses, cars are a high-multiplier item. Car manufacturing has a large supply chain, which means that making a car requires making lots of other things—generating still more jobs. Like houses, buying a new car is also an implicit bet that the future will not be any worse than the present. Finally, like housing, the jobs generated by manufacturing cars and associated goods are generally targeted at many of the currently unemployed.

Overall, the strength of the auto sector confirms and supports the strength of the housing sector; in my opinion, that is a good sign going forward.

Tomorrow, I’ll discuss what can go wrong and why we are not out of the woods yet.