Auto Industry Is the Economy’s Best Hope Right Now

If you had to point to one culprit holding back the economy over the past 18 months, it would be the auto industry. Supply chain problems like the shortage of semiconductors have contributed to weak economic growth, anemic productivity, rising prices and higher interest rates as the Federal Reserve struggles to control inflation.

While the auto industry still is a long way from normal, the data we’ve gotten over the past month suggests it is finally healing, which is going to lead to some surprisingly good economic numbers over the next few quarters. We’re already seeing economic growth accelerate at the same time inflation is coming down.

The chart of seasonally adjusted automobile sales shows how far from normal the industry has been since the onset of the pandemic. In the years leading up to the pandemic, new vehicle sales were consistently in the range of 17 million a year. They plunged in March 2020, recovered later that year into early 2021, but then fell sharply by summer as the semiconductor shortage led to fewer vehicles available to sell. Since July 2021, sales have run at a rate of around 14 million a year, three million below what one might expect.

That deficit has affected the economy in all sorts of ways. Automobiles detracted 2% from real gross domestic product growth in the third quarter of 2021 due to the sales slump, and as of the third quarter of 2022 has yet to bounce back. The industry’s problems have hurt productivity growth due to the way productivity is calculated — vehicles that would sell for tens of thousands of dollars aren’t counted as output because they’re sitting on factory floors waiting for chips that often don't cost very much.

And the impact on inflation has been profound. A lack of vehicle production pushed up prices for new and used vehicles alike — when dealers don't have much to sell they don't have to offer discounts to buyers, and a lack of inventory forces buyers into the used-vehicle market which pushes up prices as well. Those two categories account for 10% of the weighting in the core measure of the Consumer Price Index inflation report.