Experts mixed over next recession’s potential effect on Missouri auto sector

When the United States’ record-long economic expansion ends and the economy enters recession, some industries will get hit harder than others. While economists disagree on the timing and severity of the expected slowdown, it’s possible to gain insight into what it could mean for some of Missouri’s most important sectors. Take the auto industry.

Ford has a factory in the Kansas City region. General Motors has a plant in suburban St. Louis and another in the Kansas City metro area — albeit in Kansas. The auto industry accounts for about 182,000 jobs in Missouri, according to the Auto Alliance, and small, gas-powered trucks are the state’s largest export, according to the Bureau of Economic Analysis.

Manufacturing is often one of the first sectors to get hit by a recession, St. Louis Federal Reserve economist Charles Gascon said, because people stop buying durable goods like refrigerators and cars at the degree they might when the economy is better.

The industries that provide these types of consumer goods are relatively elastic compared with health care, for example, which is less influenced by economic fluctuations. While an aging population will heavily influence the health care sector, slight changes in economic conditions will influence industries such as retail, hospitality and manufacturing. Transportation is also affected by a slowing economy, because all those goods have to be transported. When production slows, demand for services like long-haul shipping does, too, Gascon said.

So what do car sales look like now?

According to Bernard Swiecki, an analyst for the Center for Automotive Research, the U.S. is experiencing a dip in vehicle sales, which affects vehicle production.

“We set an all-time sales record in 2016 of 17.5 million units sold in the U.S.,” he said. “We have been trending downward since then. We expect the dip to bottom out this year at 16.5 million.”

That’s likely due to a long run of increasing growth in the car industry.

“It’s a cyclical, bellwether industry,” Swiecki said. “We had, in 2016, been in the longest sales upturn since World War II. Eventually, the market can’t absorb so many vehicles because you’ve been selling for so long. A type of saturation takes place.”

Swiecki said that although a downturn is coming, companies are in a better position to pad a recession than during the 2008 financial crisis. At that time, car plants were over capacity, which made planned closures and layoffs hit harder than they otherwise would have.

Although layoffs will likely come, Swiecki said they won’t happen at the same scale as after the financial crisis.

“It will really hurt manufacturing across the board, but it’s going to be a sustainable event,” said Christopher Barnes, head of financial services at Escalent. “The way policymakers have positioned things, this may be a shallower recession for longer.”

But that doesn’t mean auto won’t be affected.

“Any recession is going to hurt auto,” Barnes said.

Part of that is because lots of consumers take out loans to pay off their vehicles, he said. According to CNBC, in March 2019, nearly 32% of all new cars in the U.S. were being leased. That’s double the number being leased 12 years ago at the height of the financial crisis, Barnes said.

If interest rates rise during the upcoming recession, consumers will be less inclined to take out those loans. Barnes said that could happen if bad auto and student loan debt become problems at a time of historically low interest rates.

“Lenders would tighten credit rules and potentially drive interest rates up just as the economy is slowing, making a real mess,” he said.

Barnes said he thinks some of these 96-day loans are looking more and more like the housing loans of 2008.

Jason Mantel, head of Escalent’s auto division, told a more hopeful story: Although the auto sector will be hurt by recession, some companies will fare better than others. GM, which employs thousands of people in Missouri, will likely fare better than other domestic car manufacturers, he said.

“GM is probably in the best position due to how much of a leader they are in technological electric vehicles,” he said

The industry faces other challenges: disruptors like ride-hailing apps and companies like Tesla dramatically altering the design — and production process — for automobiles.

And while a recession will hurt, it could prove helpful to carmakers in the long run, Barnes said. Layoffs will help streamline the auto workforce, in some sense.

“In a recession there’s lower capacity,” he said. “They’ll lay people off, and then when it’s over, they’ll allow people to come in with a bigger skill set.”

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