Are we skirting a recession?

Jan. 1, 2020
In mid-May, William A. Strauss stood in front of a group of automotive aftermarket professionals and told them the country is not in a recession.

Keynote speaker says we're not in a recession...yet

In mid-May, William A. Strauss stood in front of a group of automotive aftermarket professionals and told them the country is not in a recession.

Yet.

"We're probably skirting a recession at this point, but I personally don't believe we're in a recession," Strauss stressed to those attending the Global Automotive Aftermarket Symposium (GAAS) in Chicago.

As the leadoff speaker at the annual convention, Strauss, senior economist and economic advisor in the economic research department of the Federal Reserve Bank of Chicago, says we are not there yet because of employment and manufacturing rates, among others. More than a month after the symposium, he says these views still hold true.

"Of the data that has come in, some has come in a little bit better and some has come in a little bit worse," he says in a follow-up interview with Aftermarket Business. "But it's still given me confidence in my comments."

This is not the first time in recent years that the country has endured, at minimum, recession-like events. The economy slowed enough in 2001 to be dubbed a recession by the public, yet the pinch was mainly felt by the manufacturing sector, not the consumer. Today's economic slowdown is not as selective.

"At this point, I think this will be dubbed a recession. Whether or not it's just going to be really slow, stagnant growth, it's going to feel pretty bad," Strauss says.

But he argues what determines a true "recession" — saying the categorization should be based on monthly indicators, not two consecutive negative quarters of gross domestic product (GDP) growth, as generally believed. However, during recent economic analysis to determine whether or not the country is in a recession, the nation has experienced multiple quarters of negative growth, although not consecutively.

If 2008 proves to be a bad year for the consumer, the effects will run back up the channel and could translate into a lesser year for the aftermarket.

Rising gas costs are one reason consumers cite for spending less on their vehicle maintenance, yet if adjusted for inflation, oil prices would just be reaching $100 a barrel — the same price point seen in 1980. Right now, without gas taxes, gas prices are between $2.50 and $3 per gallon.

"Another thing to keep in mind is that there is a demand curve that does slope down. It is an elastic, especially in the near term, but it will have an impact," he says. "So while prices...are up 42 percent relative to where we were a year ago, gasoline sales are actually lower, and have been lower now, as you can see, through most of last year and into this year. We're actually using less gasoline in the economy, and this is an economy that has continued to expand, so people are being more frugal with their spending on and usage of gasoline."

An automotive outlook

And for the automotive sector, the economy and gas prices have left Strauss pessimistic about the coming year.

Vehicle sales have flat-lined significantly, cresting only 16 million units each year since 1999, Strauss explained to the GAAS audience.

"It's very tough to grow the aftermarket in the U.S. when there's no underlying growth for the group as a whole, and as you can see for the first time in a long time, sales are dipping below 15 million units," he says.

Sticking with the new vehicle market, inventories for passenger cars are in good shape, he notes, staying near the desired 55-day supply. However, light truck inventories are edging higher than they were last summer. Of these vehicles, imports comprise the highest market share, followed by new domestics (foreign nameplates producing vehicles in the United States) and the Big 3, which has fallen to just less than 50 percent of the market share, according to Strauss' data.

Additionally, content of these vehicles is also shifting.

"There has been significant increases by these new domestics. In fact, you could look at Toyota. Toyota content basically matches Ford and is above Chrysler. So this is, again, a pretty significant movement, and it's not surprising when you think about it," Strauss notes. "These manufacturers are all trying to come up with the same conclusion — putting the least cost landed quality part(s) at the factory door. A lot of it you supply locally; a lot of it goes globally, but they're all trying to solve the same problem — getting the best products at their factory door, and they're coming up with very similar solutions."

Some bright spots

Manufacturing, thus far, is not slipping; it is simply flat.

"Manufacturing output, I would say, is flat at this point, and this is very interesting because, again, if we're in a recession, manufacturing is usually a sector that tends to fall early and fall hard, and we're just not seeing that," Strauss offers. "If we look at the graph for manufacturing output, you know, it's experiencing a bit of flatness, a bit lower than it was maybe a little while ago, but it's not experiencing the kind of drop that we normally think about a recession being part of."

Capacity is still at a solid level from a historical perspective; and despite his suggestion of slowing at GAAS 2007, production has improved.

"This is our best measurement for how well we are doing as an economy, and in terms of our standards of living going forward, has really come back very nicely," Strauss says. "So while I'm a bit downbeat over the next year, I am very optimistic that once we weather this storm that we are dealing with in the housing and financial markets, I think the economy will be poised to do quite well."

In the end, the gross domestic product (GDP) outlook should improve in the second half, probably not to the average 2.5-percent level, but closer to 2 percent, while employment will continue to struggle. And despite GDP expectations, the light vehicle market will stay low, along with the housing market, which will continue to remain soft and the biggest risk on the horizon.

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