It’s instructive to compare what’s currently happening to the auto sector and the U.S. economy with what we saw in the wake of the 1990 oil shock.
Sales of light trucks manufactured in North America, which category includes the once almighty SUV, remain deeply depressed, with July sales down 26% compared with last year.
Domestic car sales are down 6.4% from last year, and again July of 2007 was unrepresentatively weak.
Sales of imports are doing much better.
This is very much the pattern we observed in previous oil price shocks, with an abrupt drop in the demand for Detroit’s money makers and shift into more gas-stingy imports. The resultant hit to incomes in the auto sector is one of the mechanisms whereby an oil price increase can contribute to an overall U.S. recession.
It’s interesting to compare what we’ve observed so far this year with what happened during the oil price shock and economic recession that followed Iraq’s invasion of Kuwait in August 1990. With the loss of oil production from both Iraq and Kuwait, the price of oil shot up quickly, nearly doubling between July and October, after which it fell back down almost as dramatically. By contrast, the oil shock of 2008 has been a more gradual affair, caused by booming demand from China confronting stagnating global production. Although the price increases occurred more gradually, in percentage terms the cumulative change in oil prices over the last year is almost as big as we observed in the fall of 1990.
In terms of the consequences for auto sector employment, the number of U.S. workers employed in motor vehicles and parts fell by 62,000 workers in the month of November 1990, with a cumulative loss of 94,000 auto jobs before the recovery began in April 1991. By comparison, auto employment this past year fell by 83,000 workers, cumulatively about the same size disruption as in 1990, but spread out over a longer period.
In terms of the effect on GDP, the contribution of motor vehicles and parts to real GDP fell by $15 billion between 1990:Q3 and 1990:Q4 and an additional $15 billion between 1990:Q4 and 1991:Q1. That corresponds to about 0.2% of GDP each quarter, or a hit to the annual growth rate of real GDP of about 0.8% each quarter.
Again, the overall magnitude of the response we’ve seen in autos this year is comparable to that in 1990-91, with the sector subtracting $12 billion (in 2000 dollars) from 2008:Q1 real GDP and an additional $22 billion from 2008:Q2. But because the economy overall is larger than it was in 1990, that -$22 billion lopped off only 0.6 percentage points from the annual GDP growth rate for last quarter. In other words, if real production from this sector had been the same in 2008:Q2 as it was in 2008:Q1, and none of the other components of GDP were changed as a result, the growth rate for 2008:Q2 would have been +2.5% rather than the reported +1.9%.
Of course, autos are not the only sector where we see significant shifts in spending as a result of a sharp increase in the price of oil. Airlines and some tourist-dependent areas are also hit hard, and there is an interaction between oil prices and the credit crunch for outlying exurban communities. Even so, the oil price increase in 1990 was not enough by itself to cause the recession, but may have been the factor that tipped an otherwise wobbly economy into freefall.
As Yogi Bera might say, looks like deja vu all over again.