Prosperity of the U. S. Auto Industry A Source of Major Economic Concern

What – That Goes Against Conventional Wisdom, and Every Other Kind of Wisdom

The great business success story of the second decade of this century is the rebound and strength of the U. S. auto industry.  General Motors has been resurrected from the dead, Chrysler from beyond the dead and Ford Motor Company has now reclaimed its logo out of hock and its investment grade bond rating out of junk bond status.  The industry is doing very well, even if the first quarter was not all that great for GM.

GM's North American operating profit rose 31% to $1.7 billion, with margins improving to 7%, from 5.6% a year ago. That is better than the 5% figure that U.S. auto makers once considered acceptable, but far from GM's goal of 10% globally.

Ford's operating profit rose 16% to $2.1 billion, giving it a profit margin of 11.5% for the region. However, Ford said it is unlikely to maintain retain that margin level for the rest of 2012.

So why isn’t this good news for the U. S. economy?

The problem is in the explanation.  The auto industry is going through what might be called a technical recovery.  A large part of the rise in sales in the past  2 years has been the result of the drastic decline in sales in the previous years.  That decline in sales resulted in an above average age of the U. S. installed base of light trucks and passenger cars.  The average age of the car on the road can only rise so much before that car is no longer going to be on the road.  Sooner or later the public must replace an aging auto or light truck, and that time has now come.

So the prosperity of the auto industry is not really about the prosperity of the economy as a whole.  Sales of autos and light trucks are not responding to a better economy, they are responding to a purely technical aspect of the economy.  Autos and light trucks are the main type of private transportation and commercial transport.  When the car or truck breaks down, or becomes unsafe or become too expensive to repair, people buy new ones.  And each year a car gets older, it is more likely to break down, become unsafe or become too expensive to repair.

Take away the growth in employment in the auto industry and you get a very weak set of economic data.  So the fact that the auto industry’s recovery is so dominant a part of the overall recovery is bad news. Want even worse news, the technical recovery of the auto industry may be nearing an end.

Would that it be otherwise.