What's Really Driving the Economy

Cardiff Garcia of the Financial Times pointed out a peculiar number a few weeks ago: "Vehicle purchases by consumers alone accounted for 30% of all the GDP growth in the last two quarters."

Focus on the most recent quarter and it's even more skewed. The economy grew 1.9% in the first quarter. Of that, "motor vehicle output added 1.12 percentage points," according to the Bureau of Economic Analysis.

Auto sales are what's really driving the economy. There are a couple of important takeaways from that.  

First, this isn't surprising when you think about it. Housing construction is flat on its back. Business investment growth is still faint. Net exports, as usually is the case, have been a drag on growth lately. Same with government spending, which is falling at the both the state and federal level. Auto's share of economic growth looks impressive partly because there's little competition from other contributors.

Mind you, the recovery in auto sales is nothing to sneeze at. From an annual rate of about 9 million in 2009, vehicle sales popped to an annual rate of more than 15 million earlier this year:

Source: Federal Reserve.

But what's bullish about this is that it's not hard to make the case that sales still have a lot of room to grow. As Brad Plumer of The Washington Post writes:

[A]uto sales this year are still expected to be way below the long-term average for the 2000s. (About 14.5 million units vs. 16.6 million.) Unless Americans are planning to give up driving en masse, that suggests there are still a whole lot of vehicles out there that are rapidly aging and eventually need to be replaced.

That last part is really important. According to auto research firm R.L. Polk, the average car on the road today is 10.8 years old -- an all-time high, and two years older than just a decade ago. As the recession ravaged households' finances, people squeezed as much life as possible out of their old cars (which has been a boon for auto-parts companies like AutoZone (NYSE: AZO  ) and Advance Auto Parts (NYSE: AAP  ) ).

But that's unsustainable. Until just recently, auto sales were below the average scrappage rate, meaning more cars were being taken off the road than new ones being sold. With auto financing coming back, pent-up demand to replace clunkers is now bursting through. As Mesirow Financial chief economist Diane Swonk told me in an interview last year:

Pent up demand for vehicles is very high, and it is one of the few places that they got a waiver on the consumer protection laws, so it's almost easier to get a subprime vehicle loan than it is to get a subprime credit card. You may not be able to get a mortgage, but you can buy a vehicle and live in your car, which is unfortunately what some people are doing. I think it is important to understand that this industry has been scrapping vehicles faster than we have been buying them for more than four years. The pent up demand is enormous, and there is financing available, and it's one of the places where we are starting to see some movement again, and that's positive for the U.S. economy.

There's another more subtle point here that some might be overlooking. Four years ago, high gas prices clobbered consumer spending, including (or especially) auto sales. A case can be made that it's the opposite today. Household debt has dropped dramatically since 2008, with debt payments as a percentage of disposable income falling from an all-time high to an 18-year low. Now that buyers have much more financial flexibility than they did four years ago, high gas prices might actually be boosting auto sales as fleets of high-MPG cars from Ford (NYSE: F  ) , General Motors (NYSE: GM  ) , and Toyota (NYSE: TM  ) hit the market. Sticker shock at the pump used to be an excuse to cancel a road trip. Today it's an excuse to buy a Prius.

"I watched Detroit rise like a phoenix from its own ashes more than once," Swonk said. "The auto industry's coming back right now; we are seeing it having ripple effects, and that is a positive thing." We'll take all we can get these days.  

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Ford Motor. Motley Fool newsletter services have recommended buying shares of General Motors and Ford Motor. Motley Fool newsletter services have recommended creating a synthetic long position in Ford Motor. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (36) | Recommend This Article (40)

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  • Report this Comment On June 12, 2012, at 1:37 PM, BigAl1825 wrote:

    Huh, interesting. So Obama is the reason we aren't double-dipping (yet), just as he and his team (and Congress 2009-2010, for that matter) are a big part of the reason we didn't enter a second Great Depression.

    It's too bad that the average voter (or Fool, for that matter) doesn't realize what 90% of economists know (real economists, not right-wing blowhards that claim to understand economics): you don't make cuts when the economy is weak. Saving our auto industry is exactly what our economy needed in 2009.

    What it's needed since, unfortunately, has largely been prevented by the GOP because they didn't want to see this sort of news happening during the presidential election year. Much better to political grandstand on the debt limit and erase all of the gains of 2011, and then blame lack of hiring on Obama.

  • Report this Comment On June 12, 2012, at 2:06 PM, whereaminow wrote:

    ^Hyper-Partisan much?

    I'd love to know the economic method you used to determine that the government interventions from 2008-2012 produced a more robust economy than a world from 2008-2012 without those government interventions.

    Since you have no such comparison to make (as the other world doesn't actually exist), and you have no theory to fall back on, what did you actually use to determine that Obama "saved" us from Armageddon?

    I don't vote GOP. And I'm left of Obama on several issues. So don't try to deflect attention away with attacks against my (unknown-to-you) political beliefs. Just inform me on the method you used.

    David in Liberty

  • Report this Comment On June 12, 2012, at 3:47 PM, Darwood11 wrote:

    If vehicle purchases are "driving the economy" then I have to ask, in this age of imports, which economy are they really driving?

  • Report this Comment On June 12, 2012, at 4:37 PM, PedalHard41 wrote:

    "Vehicle purchases by consumers alone accounted for 30% of all the GDP growth in the last two quarters."

    Seen this before; I counter with the notion that it isn't "consumers", it's the dealer. Vehicles are being sold to dealers, floor-planned by financial institutions, and sitting on the lot. There's an amazing inventory at every dealer. So, if these data were supported by new vehicle state registrations, then I'd believe it.

    Yep, household debt has dropped, especially when you don't pay your mortgage.

  • Report this Comment On June 12, 2012, at 4:48 PM, hbofbyu wrote:

    @BigAL1825

    You said "...you don't make cuts when the economy is weak".

    What if your huge debt is the biggest reason your economy is weak?

    Is it possible to spend more money that you have... forever?" If the answer is yes, then everything I have been taught about economics is bull crap.

    If the answer is "no", then where, exactly, is the line that you do not cross and say we will no longer increase our debt. Being that we may have passed that line long ago, there is worthless spending and there is smart spending.

    Worthless spending are giveaways like bailouts to banks, manufacturers and consumers all are temporary and don't solve the long term problem.

    Smart spending is for endeavors that have payback like infrastructure, technology, education, the space program. Not in "here's an extra $150 in your paycheck, go to the mall" programs that congress passes.

    America and Europe may need to make sacrifices over the next 10 years not seen since World War II. Austerity or inflation - take your pick. Wait, I forgot you can also choose stagflation.

  • Report this Comment On June 12, 2012, at 5:08 PM, TMFMorgan wrote:

    <<What if your huge debt is the biggest reason your economy is weak?>>

    You can tell government debt was the cause of the crisis by the fact that interest rates went negative in 2008. People were so scared of government debt that they paid the government for the opportunity to borrow.

    <<Is it possible to spend more money that you have... forever?">>

    Actually, yes. People have to eventually repay all their debt -- usually upon death. Things with indefinite lifespans (like countries) are different. As long as a budget deficit is lower than nominal GDP growth, debt-to-GDP declines. (Though that's hardly the case right now ... just responding to your question). WW2 debt was never "paid off" ... we just kept the budget roughly balanced for a few decades, and the burden dropped as GDP grew.

    <<America and Europe may need to make sacrifices over the next 10 years not seen since World War II. Austerity or inflation - take your pick.>>

    Agreed. Although devil's advocate ... people said that about Japan 20 years ago.

  • Report this Comment On June 12, 2012, at 5:09 PM, TMFMorgan wrote:

    <<If the answer is yes, then everything I have been taught about economics is bull crap.>>

    I'm sorry to hear that.

  • Report this Comment On June 12, 2012, at 5:35 PM, ETFsRule wrote:

    "I'd love to know the economic method you used to determine that the government interventions from 2008-2012 produced a more robust economy than a world from 2008-2012 without those government interventions."

    http://krugman.blogs.nytimes.com/2012/02/18/austerity-and-gr...

    Does his scatter plot represent a flawless, controlled experiment? Of course not. But it's still a heck of a lot more convincing than any argument presented by the anti-Keynesian crowd.

  • Report this Comment On June 12, 2012, at 5:37 PM, ETFsRule wrote:

    "I'd love to know the economic method you used to determine that the government interventions from 2008-2012 produced a more robust economy than a world from 2008-2012 without those government interventions."

    http://krugman.blogs.nytimes.com/2012/02/18/austerity-and-gr...

    Yes, I understand that it's not a flawless, controlled experiment. But it's still pretty good, and much more convincing than any evidence put forth by the anti-Keynesian crowd.

  • Report this Comment On June 12, 2012, at 5:37 PM, ETFsRule wrote:

    yup, double post, nice

  • Report this Comment On June 12, 2012, at 5:39 PM, whereaminow wrote:

    Morgan,

    ---->WW2 debt was never "paid off" <----

    That's not technically correct. All debt agreements - even public sector - have maturity lengths. That new debt was ADDED while the old debt was being paid does not change the fact that the old debts were paid.

    If my family continued to borrow for generations (like a government) with each debt being used to pay off the previous (as well as pay for new stuff), we wouldn't say that my Great Grandfather's debts were never paid off.

    David in Liberty

  • Report this Comment On June 12, 2012, at 5:41 PM, whereaminow wrote:

    Hi ETFs,

    1. Yep, that has nothing to do with what I asked the Obama worshipper above.

    2. Krugman has already been raked over the coals by about a dozen economists for that post.

    http://consultingbyrpm.com/blog/2012/05/thoughts-and-links-o...

    3. I don't support austerity as defined by modern economists.

    David in Liberty

  • Report this Comment On June 12, 2012, at 5:41 PM, TMFMorgan wrote:

    OK, "paid off" is incorrect. "The nominal debt load was never significantly pared down after WW2" is, and serves the same purpose in the comment.

  • Report this Comment On June 12, 2012, at 5:46 PM, Milligram46 wrote:

    @PedalHard41

    ...Seen this before; I counter with the notion that it isn't "consumers", it's the dealer. Vehicles are being sold to dealers, floor-planned by financial institutions, and sitting on the lot. There's an amazing inventory at every dealer. So, if these data were supported by new vehicle state registrations, then I'd believe it...

    Not true. Although dealer inventory foreign and domestic has grown in the last year, it is no where near 2007 or early 2008 levels. Foreign makes inventory level (as a whole) sit at around 45 days. In the car business 60 days is more optimal. That gives you adequate inventory to meet, "I want it this way with these options" buyers without having stuff sit around too long.

    Domestic inventory (as a whole) is at 67 days - pretty close to optimal. GM's truck inventory is skewing that number a bit (as a whole the skew would be just a few days) because GM ramped up inventory on 2012 production. They are going to have an extended shut down of production as they retool for the 2013 model refresh - so that inventory will be churned through.

    So right now, inventory levels are pretty normal. Car sales are at a high rate, and the recent sales tax collection data coming from the states that collect such things supports the numbers of high auto sales.

  • Report this Comment On June 12, 2012, at 5:49 PM, Milligram46 wrote:

    @Darwood11

    Today, about 70% of Toyotas sold in the United States are built in North America. About 85% of Hondas sold in the United States are built in North America. What "is" an American car anymore is an illusion.

    At the end of the day, Toyota and Honda count their profits in Yen, not US dollars (ya ya, you can buy Toyota stock, it's traded here I get it).

    The bigger win is state coffers starved of sales taxes and the local economy. People don't realize how much many car dealerships do for the local economy far beyond the sales of cars (like donate cars to the high school for student driver education, or sponsor the little league team...)

  • Report this Comment On June 12, 2012, at 5:49 PM, dcorley wrote:

    This started out with automobiles.

    Is ending with economic theory. It would seem to me that economists should be the richest people on the planet.

    How come they're not?

    My Toyota is 14 years old. So is my Ford truck.

    I think they're good for another 20.

  • Report this Comment On June 12, 2012, at 5:51 PM, TheDumbMoney2 wrote:

    Apropos, Ford actually looks like a pretty cheap stock to me. But I just can't bring myself to own these companies for the long term. I think at best Ford is another great one-to-two year trade, and I'm just not interested. But I think both it and GM are pretty clearly undervalued.

  • Report this Comment On June 12, 2012, at 6:19 PM, ynotc wrote:

    Morgan,

    I find it instructive that you reply to some questions but not others.

    whereaminow asked about the methodology that you used to draw a conclusion. This is a good question and is not partisan or argumentative.

    I believe that it deserves an answer.

    Thanks for the articles. They provoke me to think and I apprecitate that.

  • Report this Comment On June 12, 2012, at 6:21 PM, ETFsRule wrote:

    "2. Krugman has already been raked over the coals by about a dozen economists for that post.

    http://consultingbyrpm.com/blog/2012/05/thoughts-and-links-o...

    That link deals with another of Krugman's posts (one about Sweden). Not the same post that I linked to.

  • Report this Comment On June 12, 2012, at 6:26 PM, xetn wrote:

    A really nice pun "whats driving the economy: cars".

  • Report this Comment On June 12, 2012, at 6:29 PM, TMFMorgan wrote:

    <<I find it instructive that you reply to some questions but not others.>>

    Some people aren't worth getting involved with. They're more interested in turning reasoned debates into my-team-vs.-your-team sporting matches.

    <<whereaminow asked about the methodology that you used to draw a conclusion. This is a good question and is not partisan or argumentative.I believe that it deserves an answer.>>

    I'm not sure what comment you're referring to.

  • Report this Comment On June 12, 2012, at 6:33 PM, xetn wrote:

    I think all you "Keynesians" should try a little experiment: Each of you load up on debt and try spending your way out of it. Let me know how that goes.

    Debt does not an economy make. Spending does not make an economy either. Clue: you cannot purchase something that has not first been produced. Savings and investment provide the means for capital formation which, in turn, provides the means to produce.

  • Report this Comment On June 12, 2012, at 6:43 PM, hbofbyu wrote:

    What percentage of WWII debt was inflated away?

    And are you saying Japan is now free and clear?

    As long as there is a larger work force in the future then we can rob the future to pay the present indefinitely. - and our technological advances will pick up the slack while we spread out the pain to future generations.

    Germany should go into debt indefinitely (whatever it takes) by buying indefinite amounts of Greek and Spanish debt forever and ever.

    How could it not work since governments never die?

    (All I learned of economics is that there is no free lunch. Now I know that if it is processed and packaged, and shuffled though bankers, and handed out by politicians, you can get what LOOKS like a free lunch even though it is really just small bits and pieces taken from sandwiches of those who have yet to be born.)

    And I go overboard on my analogies.

  • Report this Comment On June 12, 2012, at 6:57 PM, TMFMorgan wrote:

    <<What percentage of WWII debt was inflated away?>>

    A good amount, particularly in the late '70s. But real growth (after inflation) was huge in the 50s and 60s.

    <<And are you saying Japan is now free and clear?>

    No. Just that crazy things can last a long time (more than 10 years). A lot depends on culture and demographics.

    <<Germany should go into debt indefinitely (whatever it takes) by buying indefinite amounts of Greek and Spanish debt forever and ever.>>

    Pointing out that a deficit smaller than nominal GDP growth keeps debt-to-GDP in check isn't synonymous with "whatever it takes."

  • Report this Comment On June 12, 2012, at 7:17 PM, DonkeyJunk wrote:

    @ynotc

    "whereaminow asked about the methodology that you used to draw a conclusion. This is a good question and is not partisan or argumentative.

    I believe that it deserves an answer."

    whereaminow was asking BigAl1825, not Morgan.

  • Report this Comment On June 12, 2012, at 7:22 PM, hbofbyu wrote:

    @tims999

    What are you talking about? Picking stocks drives the economy?

  • Report this Comment On June 12, 2012, at 8:35 PM, whereaminow wrote:

    Here's Krugman busted for lying yet again.

    Plus empirical research that show higher debt loads equates to slower growth.

    http://www.economicpolicyjournal.com/2012/06/krugman-zombies...

    David in Liberty

  • Report this Comment On June 12, 2012, at 8:38 PM, poach wrote:

    Good article!

    Pent up auto demand was a big factor for Peter Lynch being so successful. Read " One up on Wall Street", for his Chrysler pick in the 80's.

    Ford is looking incredibly cheap at this price.

  • Report this Comment On June 13, 2012, at 9:05 AM, deckdawg wrote:

    A couple of interesting things of note. First of all, vehicles built within the last 10 years have been of higher quality and last longer, which has enabled people to actually get those extra few years of life out of them. (This even includes American built vehicles). It is not unusual to pass 200K miles without major repairs.

    Another really interesting item is that the increased vehicle sales have been regional. Areas of the nation (the Southeast, for example) suffering the worst from mortgage hangover are lagging the rest of the country in auto sales. Here's a link to a presentation by the head of the St. Louis Fed. A really interesting perspective on the economy, for those who have the time to look through it.

    http://research.stlouisfed.org/econ/bullard/pdf/BullardBipar...

  • Report this Comment On June 13, 2012, at 9:32 AM, ETFsRule wrote:

    "whereaminow wrote:

    Here's Krugman busted for lying yet again."

    Where? Explain exactly what the lie is.

    "Plus empirical research that show higher debt loads equates to slower growth.

    http://www.economicpolicyjournal.com/2012/06/krugman-zombies...

    The debt chart doesn't refute anything Krugman said.

    They post a link to one of his blogs dealing with the relationship between spending and growth. Notice that he never claimed that higher debt levels corresponded to higher growth.

    If you really wanted to refute something from Krugman's blog, you would need to provide a scatter plot comparing government spending with GDP growth. Oh wait, Krugman already posted such a scatter plot in the link I posted earlier.

    James Eaves is just presenting a strawman argument, nothing more.

  • Report this Comment On June 13, 2012, at 9:34 AM, mdk0611 wrote:

    No argument with the current contribution of car sales. However, as far as the effect of the bailout, we'll never really know it's impact because we'll never see tha alternative. What the bailout did was select a different set of winners and losers than traditional bankruptcy. You can't assume than the Big 3 woulld have disappeared, nor can you assume that production would have moved offshore.

  • Report this Comment On June 14, 2012, at 3:13 PM, thisislabor wrote:

    "household debt has dropped dramatically since 2008, with debt payments as a percentage of disposable income falling from an all-time high to an 18-year low"

    @AUTHOR:

    You know this is highly misleading, you say from an all time high to this "new low" like things are all of a sudden better or something.

    It should read more like "house hold debt is now back within a semi-reasonable limit" as opposed to saying some kind of all time low or something.

    you guys ARE PUBLIC PRESS and your comments affect the public's opinion, too.

    at the very least if your going to say it is at an 18 year low you should state also what it should be at so the article has some kind of reflective value judgement for the readers. otherwise this crap is useless to know...

    woopty do: debt goes up, debt goes down, money abounds! - without any kind of reflective value judgement on what it should be your only inciting public populace.

    i'm serious too, and not another quack. (ok I probably sound like one... but seriously... my points stand nonetheless...)

  • Report this Comment On June 14, 2012, at 3:20 PM, TMFMorgan wrote:

    << you say from an all time high to this "new low" like things are all of a sudden better or something.>>

    I didn't say "new low." I wrote "18-year low," which is accurate.

    <<at the very least if your going to say it is at an 18 year low you should state also what it should be>>

    Unfortunately, there's no "should be" level. These things aren't that simple ...

    Thanks,

    Morgan

  • Report this Comment On June 15, 2012, at 3:00 PM, stubucks wrote:

    Have we shipped so much of our manufacturing overseas that we are now dependent upon one segment of manufacturing industry for our economic growth? This is troubling and dangerous. Economists have been saying for years the USA was shifting from manufacturing to service oriented jobs. Can service jobs sustain our economy?

  • Report this Comment On June 17, 2012, at 9:40 AM, HB23 wrote:

    About the economic discussion above: don't know whether government spending helps or hurts during a asset bubble bust?

    Read about the "Savings conundrum"

  • Report this Comment On June 27, 2012, at 1:32 PM, thidmark wrote:

    It's really difficult to bolster an argument by citing a partisan loon.

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