Strong Employment Bodes Well for 2011 Car SalesBy Lacey Plache May 9, 2011
For the third month in a row, labor market recovery has demonstrated growing strength, with 244,000 non-farm jobs added to the economy in April. This stronger than expected job growth in April indicates strength in the economy itself and is further supported by upward revisions to February and March payroll employment numbers of 235,000 and 221,000, respectively. The result is particularly encouraging as it occurred in spite of growing economic uncertainty from multiple sources.
Inflation threats from rapidly rising oil and commodity prices, Japanese earthquake and ensuing parts shortages in multiple industries, and a weakened dollar all have contributed to a more challenging environment for economic growth. While it would not be surprising for companies to limit expansion in the face of such uncertainty, any factor that exercises a drag on the economic recovery potentially threatens the auto sales recovery as well. Given the headwinds that auto sales currently face regarding constrained supply and its accompanying upward effects on prices, it is essential that the key drivers of demand remain strong to support sales momentum seen in the year to date.
Employment is important for auto sales since it directly impacts consumer ability to pay for auto purchases, which in turn drives demand. During the recent Great Recession, monthly auto sales declined 41 percent based on a Seasonally Adjusted Annual Rate (SAAR). At the same time, the economy lost more than 7 million jobs between December 2007 when the recession began and June 2009 when it officially ended. Net job loss continued during the rest of 2009 with nearly 1.5 million additional jobs lost. Combined with population growth during the recession and the recovery to date, the economy is lacking over 10 million jobs in comparison to pre-recession levels. A healthy recovery should add at least 250,000 jobs per month. Even at this rate, which despite recent increases has yet to be reached and maintained during the current recovery, we are still over three years away from regaining these lost jobs.
Of course, every journey must start somewhere, and the recent employment results are encouraging indeed. In the private sector, U.S. employers added 268,000 jobs in April. Jobs were added in both the goods-producing and service-providing sectors, which account for 16 percent and 84 percent of private jobs in the economy, respectively. The additions to each sector were consistent with that sectors share of private jobs. Key goods-producing sectors contributing to job growth were manufacturing (adding 29,000 jobs) and mining (adding 11,000 jobs). Even the construction sector added 5,000 jobs. On the service-providing side, the retail sector had a sizable increase of 57,000 jobs. Despite the Easter season, these additions do not appear to be the result of seasonal hiring. In contrast to the private sector, the government shed 24,000 jobs in April, continuing a six-month trend. Such losses are to be expected as government stimulus winds down, and, in fact, are a positive sign that the economy is gaining strength on its own.
In contrast to positive job growth, the unemployment rate increased from 8.8 percent in March to 9 percent in April. This rate is from the Household Survey whereas the payroll employment data is from the Establishment Survey, generally considered to be the more reliable of the two sources. Even so, the increase in the unemployment rate serves as a reminder that we are still in the relatively early stages of a healthy recovery. Sluggish wage growth serves as a similar reminder. Average hourly earnings grew just 0.1 percent in April, failing to meet expectations of 0.2 percent growth. Such a result is not surprising, however. There will be little upward pressure on wages until the excess supply in the labor market decreases, i.e., until more jobs are added to the economy and the ranks of the unemployed thin.
Persistent unemployment during the recovery has been often cited as a key obstacle to auto recovery, and, certainly, improvements in the labor market can only have positive effects on auto sales. However, despite its importance, employment recovery has not been the only factor contributing to auto sales growth as of late. Notably, the recent momentum displayed by auto sales began before net job addition accelerated. Auto sales stagnated in the mid-11 million SAAR range for much of 2010 before topping 12 million SAAR in October 2010. Since that point, auto sales have continued to show strength, and SAAR was above 13 million during each of the past three months. At the same time, however, the unemployment rate did not show substantial improvement until December 2010, and even then, was driven by people leaving the labor market in discouragement rather than by actual employment growth. Furthermore, payroll employment growth, as reflected by job creation, did not show sizable gains until February 2011.
These patterns suggest that a factor other than employment improvement triggered the recent momentum in auto sales. One likely contributor is consumer confidence, which has shown an upward trend since September 2010. While it is doubtful that improving employment conditions were a key underlying cause of growing confidence in this case, the U.S. stock markets bull run in which the Dow Jones Industrial Average rose from around 10,000 at the end of August 2010 to a recent high of over 12,800 unquestionably buoyed consumer spirits, and accordingly, their motivation to purchase durable goods, such as autos. In addition, confidence has grown as the recovery has progressed, and especially after the avoidance of a double dip last summer. Increased consumer confidence would have triggered the release of pent-up demand for autos, in particular from consumers who were delaying auto purchases due to generally weak economic conditions, rather than due to personal constraints from a weakened employment situation or decreased access to credit.
Pent-up demand is far from spent. During 2008-2010, auto sales fell far short of the 16+ million level seen during much of the 2000s, with a resulting 13 million or so units potentially not purchased. Even assuming that some of those lost sales were diverted to used cars and that some have been eliminated as households scale back on the number of vehicles owned, there are still potentially millions of units of pent-up demand to be released. The recovery has reached a level that many economists believe is sustainable. If this conclusion proves correct, then improvements in consumer confidence should also be sustainable, thereby supporting a further release of pent-up demand and bolstering auto sales.
These factors reduce the need for improving employment conditions as a driver of the auto sales recovery in 2011. However, as underscored by this months employment report, an employment recovery appears to be underway, driven by underlying strength in the economy. In addition, the recent decline in oil prices eases one key headwind constraining employment growth. Continued growth in employment should add force to the auto sales recovery, further motivating auto sales and, in particular, providing demand strength in the face of rising auto prices. The main risk is that auto demand will prove too strong in the face of constrained supply and drive auto prices higher still, thereby dampening demand once more. The interplay of these forces will be key determinants of auto sales in the months to come.