Guest commentary: Automakers, dealers will weather gloomy economic forecast

For over a year, CEOs, economists, analysts and the like have been warning of an economic downturn. They say a U.S. recession is coming in the second half of 2023. That time frame looms on the visible horizon.

Granted, 2022 wasn't an economic year to celebrate. Inflation hit a 40-year peak, gasoline prices soared, consumer sentiment plunged and markets fell by 20 percent. Still, the United States managed to avoid a recession and U.S. car dealers experienced strong profitability, although returning to normal is fraught with unknowns.

Back in January, Federal Reserve Bank of Richmond President Tom Barkin said, "This has been the most predicted potential recession in memory."

JPMorgan CEO Jamie Dimon has warned of serious economic danger lurking just over the horizon. Given the risks that may lie ahead, he told Bloomberg, "I would take a mild recession happily."

At the Sohn Investment Conference, billionaire investor Stan Druckenmiller didn't mince words either. A hard landing is coming, he cautioned, and "it's just naive not to be open-minded to something really bad happening."

Bloomberg reported an interest spread between the two-year and the 10-year Treasury had reached 86 basis points, the widest since the 1980s, resulting in a notable yield curve inversion. Inverted yield curves such as this have predicted the last seven recessions, and the yield curve has been inverted since July 2022. The current inversion is deeper than it was before both the 2008 financial crisis and the 1990 recession. The inverted yield curve has been a historically strong predictor of recessions, a leading indicator with a robust track record of reliability.

Many voices are predicting a U.S. recession. The Fed's own experts predicted in March that "the potential economic effects of the recent banking-sector developments" would lead to "a mild recession starting later this year." They have raised rates higher and more quickly than they have in decades, and some say that the ongoing U.S. regional banking crisis is an early warning sign of stress on the system. Bank failures have made borrowing more difficult, which can curb spending and weigh heavily on economic activity.

What does this mean for the auto industry?

The narrative seems to shift by the week, in what has been the longest recession watch in history. Stock markets enjoyed a strong first half on hopes the economy was on its way to a possible soft landing. Inflation has cooled without the normal correlative spike in joblessness and the Fed appears to be near the end of its rate-hike mission.

Although good reasons for caution remain, such as the highest credit card debt on record, personal savings rates anchored near multiyear lows below 5 percent and 30-year mortgage rates back above 7 percent, the resilience of the U.S. auto dealer always seems to prevail. Change and adaptation is not new to an industry that has experienced many shifts in its operating environment and business model.

Barkin, of the Federal Reserve Bank of Richmond, said in an interview, "During this two-year period, auto dealers and auto manufacturers discovered that a low-volume, higher-price model was actually a very profitable model." It could be said that the auto industry used this opportunity to generate greater than normal profits.

In the recession of 1990, sales dropped over 5 percent from the previous year. Some all too familiar signs were present prior to the decline — an inverted yield curve, low consumer sentiment and record personal debt, the same economic factors in play now. The recession of 2008 saw U.S. car sales drop 18 percent, dramatically dipping back to 1990 levels. No surprise, an inverted yield curve, low consumer sentiment and record personal debt all were present and accounted for as a precedent to declining auto sales.

Notwithstanding the gloomy forecast we are bombarded with daily, today's consumer has faced some unusual times over the last few years, without a historical playbook to serve as a guide. After shutdowns and disease outbreaks disrupted global supply chains, leading to the highest inflation in 40 years and consequently aggressive rate hikes from global central banks, the job market is strong and the consumer is still spending.

Following decades of weak wage growth, workers have enjoyed the largest pay gains in a generation, especially those at the lower end of the pay ladder. Combine this with record low unemployment and we wander into uncharted prerecession waters. It appears that consumers are shrugging off the higher interest rates and have not curbed their spending. In both the housing and auto industry, supply has not kept up with demand.

Consumers are looking into the future with a sense of calm. Job security bolstered by a recent gain in wages has allowed them to dismiss the headlines, presumably because their willingness to spend is not solely based on today's economic environment, but also on their personal income expectations and their outlook of the future.

When you combine a consumer base willing to spend with pent-up demand created by supply chain interruptions, it is reasonable to hope to disrupt predictive indicators. The formally predictable impact of an inverted yield curve leading to a recession — that ultimately chokes off auto sales — may now be challenged.

An interesting fact to consider when analyzing how pent-up demand will affect total sales is to recognize the correlation between total sales and total miles driven. While U.S. sales declined from over 17 million units in 2019 to approximately 13.6 million units in 2022, the miles driven in that period increased. According to the Department of Transportation, in 2021 miles driven increased over 11 percent from the previous year and were up over 5 percent in 2022.

Looking ahead, I do not share the negative sentiment of the mainstream narrative circling the auto industry in 2023. Yes, we are experiencing an extended inverted yield curve. Yes, this inversion usually predicts a recession and yes, recessions have meant a decline in car sales. Maybe, not this time. Years from now, when economists are trying to explain the cycles of the auto industry and publish their predictions of doom and gloom, 2023 will be the outlier. The reason, once again, is the resilience and adaptability of the U.S. auto dealer.