Low Job Growth Won't Stop Car Sales For NowBy Lacey Plache July 13, 2011
Despite the second month in a row of almost no job growth in the U.S., the potential impact of employment weakness on car sales is still somewhat limited, at least in the short run. Deferred demand that accrued during the recent supply disruptions caused by the Japan earthquake in March should support car sales in the coming months as production returns to normal and automakers rebuild their inventories. Ultimately, sustained significant growth in auto sales will require sustained significant growth in jobs. However, there is potential in the short-run for car sales to regain some momentum even before the labor market recovery regains momentum.
As noted last month, employment has not been the key driver of car sales recently. Rather, car sales momentum earlier this year arose, in large part, from the release of pent-up demand, which in turn was spurred by rising confidence supported by the rising stock market. Recent stock market volatility in the U.S. is likely to subside in favor of stronger performance if enough upcoming second quarter earnings reports return the expected positive results. Consumer confidence, and thus auto sales, should be bolstered by this perceived wealth effect, at least in the short run.
More importantly, the supply shortages and ensuing price increases that constrained sales following the Japanese earthquake are diminishing. While the inventories of Japanese automakers fell as much as 40 to 50 percent from pre-earthquake levels through early June, they have now stabilized and are expected to increase in the near term. Production has increased on many models, including returning to normal on at least 8 of the 12 models Toyota produces in North America. Net prices, which increased on average as much as $400 above pre-earthquake levels, were only $200 above pre-earthquake levels on average in June. As inventories grow and prices continue to fall, consumers who deferred auto purchases in the past few months can be expected to return to the market. This demand will also support car sales momentum in the coming months.
Still, the employment figures are discouraging and provide more evidence of a current soft spot in the economic recovery. They threaten to constrain consumer spending by limiting income as well as by dampening confidence in economic conditions. According to the Establishment Survey, only 18,000 non-farm jobs were added in June, and April and May results were revised downward to 217,000 and 25,000, respectively. The June result came as a shock to economists, whose consensus expectation was 105,000, with the low end of the range at 65,000.
Only 57,000 new nonfarm private sector jobs were created in May, missing expectations of 125,000 and falling far short of the 250,000 or more needed to fuel a healthy expansion. Key private-sector industries adding jobs included leisure and hospitality, professional and business services, health care, and manufacturing, while other private-sector industries lost jobs or saw little change in their employment levels. The government continued to shed jobs, with state and federal governments joining their local government counterparts this month. Meanwhile, the Household Survey returned another increase in the unemployment rate, which rose to 9.2 percent in June, up from 9.1 percent in May and 9.0 percent April.
Lacking Positive Signs
A closer look at the details of the employment report provides very little in terms of positive signs. Unlike last month, average hourly earnings showed no change, and the average workweek for all workers fell to 34.3 hours from 34.4 hours. Both measures failed to meet expectations. In addition, the unemployment rate reflected jobs actually lost as opposed to workers reentering the work force. In fact, the labor-force participation ratethat is, the share of the population in the jobs marketfell to a nearly three-decade low of 64.1 percent, indicating that workers are leaving the work force.
The only apparent contradiction to these abysmal employment results comes from another employment report. The day before the Bureau of Labor Statistics (BLS) reported its results, payroll processor ADPs employment report told a very different story regarding growth in private, nonfarm jobs. ADPs monthly survey returned the result that 157,000 jobs added in Junea result that caused many economists to raise their forecasts of the BLS results. The producers of ADPs report could not explain the disparity, but some observers have suggested that differing adjustments in the two reports for seasonal variation may have resulted in the diverging numbers. In any case, while the two series are highly correlated over time, they can vary widely on a month-to-month basis.
Soft Spot Likely To Persist
The fact that Junes employment results failed to improve upon Mays provides additional evidence that the economy is in a soft spot. Moreover, a rapid rise from this soft spot seems less likely than it did last month. The key factors contributing to Mays lackluster employment performance included rising fuel prices, supply disruptions in the auto industry and other industries, and extreme weather. To some extent, these factors likely affected June results as well. Fuel prices remained in the high $3 range during June, auto inventories continued to decrease through the second week of June, and more unusual tornadoes occurred in early Juneall of which would have been affecting hiring decisions through the week including June 12, when the BLS conducted its employment surveys.
However, by the survey week, firms would have already been aware that the drag exerted by these factors was easing. Fuel prices had been falling since early May and the Japanese automakers had announced plans to return to normal production as early as June for some models. The lack of effect of these actual and expected improved conditions on employment indicates a renewed caution on the part of firms and suggests that more sustained improvement will be needed for them to regain confidence in the economic recovery and resume substantial hiring.
In addition, renewed uncertainty at home and abroad is likely to further contribute to an attitude of caution with respect to hiring. One such source of uncertainty is the current debate over whether to raise the federal governments debt ceiling and the threat of government default on its obligations if the ceiling is not raised by August 2nd when the government hits the limit of its ability to borrow. Participants in the debate are citing a wide range of potential effects of such a default, including widespread business failures and job losses. At the very least, the economy would be negatively affected by sharp, sudden cuts in government spending.
An additional source of uncertainty stems from the worsening debt crisis in Europe. The risk of default looms high for Greece and weeks of negotiations among the eurozone governments have yet to produce a plan to resolve the crisis. As a result, financial markets around the world, including in the U.S., have been quite volatile as of late in reaction to the uncertainty of Greeces fate as well as of the potential for a contagion effect in which a Greek default provokes default in other European nations at risk, including Italy, Spain, and Portugal.
Growth In Autos, Growth In Jobs
Under normal circumstances, auto sales momentum would be difficult to achieve in the face of a slowdown in hiring and increased uncertainty about economic conditions. However, the supply shortages caused by the Japanese earthquake are far from normal. We estimate deferred demand resulting from these shortages and the associated price increases to total more than2.5 million units at a Seasonally Adjusted Annualized Rate (SAAR) of sales. In May, the SAAR of 11.8 million units fell short of the 2011 forecast of 12.9 million by 1.1 million units. Junes SAAR of 11.4 million units underperformed by 1.5 million. Julys SAAR also will likely increase deferred demand, although by less than Mays and Junes contributions.
Of course, it is possible that automakers will not be able to recover some lost sales if these sales represent lost demand - for example, if consumers decide not to make new auto purchases due to increased concerns about current and future economic conditions. However, the amount of lost demand is likely to be minimal in this case. Typically, lost demand for new cars would occur from buyers defecting to the used car market. In recent months, however, used cars also have been subject to tighter inventories and higher prices resulting from increased demand for Japanese and fuel efficient cars by consumers and dealers.
The key challenge for auto sales momentum will come when deferred demand from the recent shortages is depleted. We expect the lost sales to be largely made up by late fall. At that point, employment and income growth, which drive consumer spending, will be more critical than ever for driving auto sales. Ironically, the expected upcoming rise in auto sales from deferred demand may be the key factor for sparking the jobs growth needed for auto sales momentum to continue.