Analysis: UAW strike just one issue to watch in auto industry

I have been thinking a lot about the auto industry recently. I do not have enough information to formulate an opinion about the recent round of contract negotiations, other than to say companies have to make a profit, workers have to be paid, and I hope they can find a win-win deal.

Nevertheless, there is a potential for significant economic consequences in all of this, especially for the plastics industry. So it is useful to take a closer look at some of the recent trends that might affect us.

The first trend I want to highlight pertains to motor vehicle miles traveled. This data has been around for a long time, but I used to take it for granted. The total increased every year, and any fluctuations in the growth rate were mostly due to either the price of gasoline or whether the overall economy was in a prolonged recession.

Then the pandemic disrupted that long-term secular trend. One thing worth noting is the data has not yet recovered to the peak level it hit in 2019. As of right now, it is still about 2 percent below the peak. But it is on a trajectory to get back to another all-time high within a year or so.

The implication here is that demand for motor vehicles and parts, both new and replacement parts, is quite healthy. The precipitous decrease in miles traveled during the pandemic has reversed and is now accelerating upward.

You will note the slope of the line ramped up this past summer. Maybe this was due to more workers returning to the office, or maybe it was due to an increase in recreational travel—or both. Gas prices were higher than they were a year ago, and so were interest rates, but neither of these factors have slowed Americans down in 2023.

Another important indicator is the trend in total U.S. motor vehicle assemblies. Once again, it is easy to identify the disruption in the trend caused by the pandemic, but the post-COVID recovery in this dataset has been more complicated.

The data is currently within about 5 percent of getting back to its pre-COVID levels from 2019, but the cyclical peak in this data was actually hit in 2016. The data had been trending downward for about three years when COVID shut us down, so there is some explanation required when you discuss how far the industry has to go to be fully recovered from the effects of the pandemic.

This cyclical wrinkle notwithstanding, the recovery in this industry would have been much sharper if not for the supply chain issues it encountered in 2021. As a result of these issues, consumer demand and market supply have not yet reestablished their equilibrium because the post-pandemic demand has yet to be fully sated.

We can see that miles traveled declined sharply and then recovered sharply. The supply of motor vehicles also declined sharply, but so far, the recovery in this data has been impeded. More vehicles are needed if the supply is going to catch up to the amount of demand implied by the number of miles currently being driven.

Under normal cyclical circumstances, demand for motor vehicles would be very sensitive to the type of interest rate increases that the Fed has administered during the past year and a half. But these charts indicate that miles driven continues to increase and the number of vehicles assembled is also rising briskly despite the spike in interest rates. I would describe this as not normal and also quite surprising.

All of this brings me to a third trend that I rarely analyze and that is the trend in the Consumer Price Index for new and used vehicles. We all know by now that the total CPI is commonly used to monitor the rate of inflation in the U.S. economy. We also know that the Fed is trying to slow the rate of inflation by dampening overall demand with an aggressive campaign to raise interest rates.

According to the Bureau of Labor Statistics, the CPI for new and used vehicles (passenger cars and light trucks) increased by 30 percent during the two-year period from the first half of 2020 to the first half of 2022. Since then, the trend in vehicle prices has been mostly flat.

Clearly the lack of supply during a time of rapidly recovering demand in 2021 caused a sharp spike in car prices. And the fact that supply is still not keeping pace with demand has kept prices at an elevated level through the present time, though the trend in prices has plateaued over the past year. The Fed's program of raising interest rates has dramatically raised the cost of financing for vehicle purchases, but so far, the data indicates this has not put much of a crimp in consumer demand for new and used vehicles or vehicle prices.

As I stated above, I do not have an opinion on how the contract negotiations should be conducted, and it is far too early to assess the impact of the agreement. But I think it is fair to conclude that any increase in the wages paid to workers will keep upward pressure on new vehicle prices, and it will put downward pressure on automakers' margins.

The plastics processors that supply this industry are quite familiar with the need to adapt to these kinds of pressures, but I am not sure the rest of us are. Will the current levels of pent-up vehicle demand persist, or will demand for motor vehicles start to contract due to the escalating cost of financing?

On a macroeconomic level, what will the recent trend of rising wages, across several sectors of the economy, mean for the overall rate of inflation? Will the Fed feel the need to raise interest rates again? Or will it keep rates at the current restrictive level for a longer period of time? Or do consumers finally hit their limit, rein in their spending behaviors, and thereby push the economy into a recession?

Presently, the economy is on a glide slope for a "soft landing." This outcome seems more probable than any of the risks mentioned above. And a scenario in which the supply and demand imbalances in the auto industry and the U.S. labor market may correct on their own without a recession given a sufficient amount of time. But I cannot dispel the risks of the less optimistic scenarios just yet.