Auto Recovery in Overdrive, but for How Long?

Car sales have been one of the bright spots of the economic recovery, but will they bounce back fully?

An Indonesian worker polishes the grill of the Chevrolet Spin at the newly inaugurated plant of the U.S. giant carmaker General Motors in Jakarta on May 8, 2013.
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Everyone knows the recovery from the Great Recession has been slow, but in at least one sense it has come roaring back.

Monthly vehicle sales are coming back as strongly as they have after previous recessions, as measured from the lowest point in the last two major dips in vehicle sales, as GM Chief Economist Mustafa Mohatarem reported recently in a presentation at the U.S. Chamber of Commerce. In the below graph, all three lines are set to start at 9.2 million, the lowest point in monthly auto sales during the Great Recession, according to Commerce Department data. By that measure, the latest recovery is moving at the same pace as the early-'80s recovery and even faster than the early-'90s recovery.

(St. Louis Federal Reserve)

Compare that to the bounce in GDP over those same three recoveries. The latest real GDP figure is only around 110 percent of where it was at its lowest point during the recession – lower than the other two recoveries.

(St. Louis Federal Reserve)

What's behind the bump in car sales? One factor is that people could finally buy cars again after cutting back for so long. Auto sales fell nearly in half from pre-recession levels of more than 17 million per month to a low of 9.2 million in early 2009.

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"Some of it clearly is pent-up demand. There's the fact that whenever the economy turns down people start delaying purchases," says Mohatarem.

In addition, low interest rates have helped to buoy auto sales, making financing easier for buyers.

That's not to say that the recovery for the auto industry has been perfect. For one thing, there is plenty of ground to make up. The plunge in auto sales was far bigger in this recession than in 1991, and there was virtually no dip after the early-2000s recession. Because of that massive dive, U.S. auto sales have yet to reach their pre-recession trend levels. Roughly 15.5 million cars sold in October, compared to the 17.5 million often sold per month in the early- and mid-2000s.

The question is when that level will again be hit. One of the chief factors dragging on car sales is a generation of Millennials holding back on car purchases, despite a continued economic recovery. An analysis released last week by Edmunds.com found that young car buyers accounted for only 11.4 percent of car purchases in 2012, down from 12.6 percent in 2011. And a much-cited 2011 University of Michigan study found that while the share of licensed older drivers grew from 1983 to 2008, it fell substantially among younger drivers.

There are plenty of explanations out there for why young Americans aren't showing increasing interest in cars. Some believe it's simply a function of economics.

"Millennials haven't seen the same benefits in the labor, housing and stock markets that Baby Boomers and others have enjoyed over the last year," says Edmunds.com Chief Economist Lacey Plache in a release on the company's latest data. "As a result, younger Americans across all income levels have had trouble pulling together the financial motivation to buy a new car."

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Mohatarem believes it's simply a function of the economy – as younger adults see better employment opportunities, move out of their parents' homes, start households, and have children, he says, they will naturally gravitate toward the auto market.

"If you get married and have children, priorities change. ... [If] your kid gets sick and you have to get to the school or something, you'd have to be able to do that very quickly," he says. "That's when the behavior changes."

Then again, the explanation for young Americans' waning auto appetites could also be cultural – later rates of marriage and childbearing are not entirely due to economic forces, for example. A recent report from U.S. Pirg, a national federation of state public interest research groups, concludes that Millennials simply want more urban, walkable neighborhoods and are therefore also looking for transportation options that leave them "less reliant on driving."