The Columns

The Auto Industry and the Economy

— by on April 26th, 2012

By Michael Smitka
Professor of Economics
(This piece originally appeared in The Roanoke Times.)

Overall, the United States remains mired in unemployment, still above 8percent some five years after the onset of the Great Recession. Against this backdrop, the auto industry seems to offer hope of recovery.

Yes … but.

Yes, car and truck sales are booming. March’s seasonally adjusted annual rate of 13.8 million units represented a 60 percent increase from the 8.5 million rate of February2009. Output tripled; jobs followed.

Since the doldrums of the summer of 2009, factories have added 140,000 workers, while new and used car dealerships hired 232,000. That’s roughly 8percent of the jobs added during our anemic recovery, and well above the industry’s 2 percent share of overall employment.

Other slices of the data show a similar story. Michigan has added 150,000 jobs overall, lowering unemployment by 1.9 percentage points during the past 12 months, the sharpest decline in the nation. That recovery continues, with the auto industry featuring prominently. For example, Toyota and Nissan will add 150 engineers each to their engineering centers, reflecting Michigan’s role as the world’s single biggest nexus of vehicle development.

And it’s not just Michigan: exports are at a 20-year high, helped by plants such as BMW’s in South Carolina, which ships 70 percent of its output of X-3s and other high-value products to other countries. Spartanburg is an island of low unemployment in a state performing worse than average.

But looked at from another angle, the news remains grim. Sales may be up sharply but are still 2.5 million units below the 16.3 million average pace of the previous 15 years. In the mid-2000s, the industry employed 3 million workers. Despite the recent gains, we are still more than 500,000 jobs below peak. On the employment front, the glass is not yet half full.

Will recovery add back all these jobs? On the negative side, the U.S. is now the third-largest car market, behind China and the European Union. As the BRIC countries (Brazil, Russia, India and China) and other economies grow, sales will rise and investment to assemble cars locally will increase. Over time, design and engineering jobs will follow.

We face long-term, and not just short-term, challenges as the industry continues to globalize. China, for example, is serious about electric cars. But in the face of an outcry by Congress over a failed solar panel venture, the U.S. has pulled the plug on electric vehicle startups, refusing to disburse funds for firms that have finished the engineering stage to hire the workers and buy the parts needed to commence production. If the Chinese market grows, we can expect to see technology — high-tech jobs — flow to where the money is.

It’s not just batteries, either. For the first time ever, more than half of the finalists for the Automotive News PACE supplier innovation competition were based outside the U.S. As an independent judge for the competition, one firm I visited this year was Continental, a German company launching a new telematics system that will facilitate hands-free services outside the luxury segment.

The first company to adopt the system is GM — but it will be on Chevys sold in China, not in the U.S. That’s where the growth is. The hardware was developed at Continental’s telematics R&D center outside Chicago, but the software engineering was done in Shanghai, where the electronics “black box” is also assembled. We’re a player, but with globalization, we’re not as big a player as in the past.

On the flip side, there is encouraging news: BMW and Mercedes chose to base plants in the U.S. to make key global products, while Korean and Japanese assemblers and suppliers continue to move jobs here: Production follows sales, and Toyota, Honda and Nissan — the Japanese Big Three — now have full-fledged vehicle engineering capabilities in the U.S.

Given current exchange rates, we remain an attractive production base, with a wide array of suppliers and specialized engineering firms, good infrastructure, stable politics and a robust ability to overcome shocks. But the slower the recovery, the more we will see new technologies and the accompanying skilled jobs shift to where the sales are. On net, I doubt we’ll ever fully recover.

Michael Smitka, professor of economics at Washington and Lee University, has conducted research on the auto industry for more than two decades.