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.