Car Sales Indicate Recession

THE TIMES - - A newly unveiled car-sales indicator suggests that the U.S. economy is about to go into a recession ? or is already there.

News last Friday that Ford was cutting 20 percent of its production may be the first of coming problems faced by the auto giant ? and industry analysts expect GM and Chrysler to make similar cuts soon.

But the bad news is that falling car sales is one of the strongest indicators of recession.
The New York Times reported this weekend that since World War II, car sales have been a near-perfect barometer of the nation?s economic health.

According to the indicator, if sales by new-car dealers are down by 2 percent or more over 12 months, compared to the 12 previous months and adjusted for inflation, then a recession is either underway or set to begin within a few months.

And the figure stood at minus 2.4 percent when June sales figures were released by the Census Bureau.



The indicator has correctly called five recessions since 1968, and has never warned of a recession that did not occur, according to an analysis by The New York Times.

For instance, the indicator dipped to minus 2.9 percent in November 1979, and a recession began two months later; it dropped to minus 2.6 percent in May 2001, just two months after a recession began.

The indicator measures all sales by new-car dealers, including the sale of used cars, parts, and service. It does not measure sales by dealers who sell only used cars.
The accuracy of the new indicator ?makes sense, in part because there are often cheaper alternatives to new-car dealers, whether for service or for buying used cars that may be older or have more miles than the preowned vehicles that new-car dealers feature on their used-car lots,? the Times reports.

Consumers tend to look for these cheaper alternatives when the economy slumps, and right now they are being pinched by higher fuel prices at the same time the slumping real estate market is making it more difficult to take money out of home equity to purchase a vehicle.

If a recession is indeed underway, the recent economic recovery coming out of the recession that began in 2001 ?will have been the least beneficial one ever for the new-car dealers,? according to the Times.

The best yearly increase in sales during the recovery was a paltry 6.9 percent, ?far below the peaks of other recoveries.?

A key reason for lagging car sales during the recent recovery is the real estate bubble. Residential real estate accounted for more than two-thirds of recent GDP growth ? and other key sectors never saw the same overall rebound. Now, the real estate boom has come to an end . . . and the consequences may be dire for the U.S. economy.