Recap of the Automotive Insights Conference sponsored by the Federal Reserve Bank of Chicago–Detroit Branch, Detroit Association of Business Economists, and WardsAuto

By Martin Lavelle

On January 12, 2017, the Federal Reserve Bank of Chicago’s Detroit Branch, the Detroit Association of Business Economists (DABE), and WardsAuto hosted the inaugural Automotive Insights Conference. The conference was an expansion of the DABE’s annual Bob Fish Memorial Automotive Luncheon. As did the luncheon, the conference provided an opportunity for auto industry analysts to share their insights and forecasts for the coming year. The expanded conference format allowed for additional presentations that covered powertrain production schedules and upcoming regulatory requirements for new vehicles.

Sales Outlook

Haig Stoddard (WardsAuto) said that new light vehicle sales reached 17.5 million units in 2016, eclipsing the previous record of 17.4 million units set in 2015. The surge in new light vehicle sales seen in the fourth quarter of 2016 was correlated with the aggressive incentives offered by auto companies. New auto sales have now increased for seven consecutive years—the longest such streak since before the Great Depression. Against this backdrop, Stoddard forecasted a slight step back in sales to 17.3 million units in 2017.

Consumers are in a better position to enter the market for new vehicles, contended Paul Traub (Federal Reserve Bank of Chicago–Detroit Branch). He showed that consumer sentiment has been improving, indicating the people are becoming more open to buying new vehicles. In addition to the aggressive incentives offered by auto dealers, loans with longer terms than normal (typically lowering the monthly payments), falling household debt, and fairly easy access to auto credit are facilitating new car purchases. Stoddard and Traub argued the pent-up demand for new vehicles stemming from the Great Recession has been satisfied.

Stoddard’s long-term sales outlook called for a further slide in light vehicle sales in 2018 followed by a rebound. While Stoddard’s outlook did not include a recession, he indicated that if a mild recession were to occur, new light vehicle sales would be 1.5 million to 2.0 million units lower four years from now. Stoddard said the long-run trend for new light vehicles sales would reach 17.0 million units by 2025. That sales level would then become the new standard for whether or not it was a good year for new light vehicle sales. New light vehicle sales will exceed long-run expectations if consumer demand for the latest vehicle technology accelerates. In contrast, new light vehicle sales will fall short of long-run expectations if consumers are enticed by deals for used vehicles, young people continue to delay household formation (on account of student debt and other reasons), and telecommuting becomes even more popular than it is today, among other factors.

Future Direction of Vehicle Production

Little to no growth in new light vehicle production is expected for the U.S. over the next few years, with gains made elsewhere, according to Stoddard and John Sousanis (WardsAuto). Stoddard predicted that North American production will rise over 500,000 units over the next seven years because of increased production of small cars and crossover utility vehicles in Mexico and lower production in Canada. Sousanis also said he projected the light vehicle production share of cars and trucks to stay the same globally over the coming years, but these shares are anticipated to vary more by region. Turning to his forecasts for auto parts manufacturing, he said that more than 50% of the growth in powertrain production over the next seven years will occur in China. Moreover, internal combustion engine displacement and the average number of cylinders in a vehicle should continue to move downward, but remain relatively higher among vehicles sold in the North American market. Slightly more diversification among transmission types is expected among future vehicles, stated Sousanis.

The diversity in transmission production will partially result from manufacturers employing different technologies to comply with the federal government’s corporate fuel economy (and emissions) requirements by model year 2025. (1) Brett Smith (Center for Automotive Research) outlined how the auto industry is trying to meet these standards. By utilizing different technologies, the auto industry is innovating faster than originally anticipated by regulators. For instance, battery cell producers have lowered their cost structures earlier than anticipated—with much less capital and smaller economies of scale than thought necessary. (2) Yet, the current pace of innovation is not sufficient, according to Smith, as the auto industry is still “nowhere near” on track to achieve the 2025 fuel economy goals.

To help manufacturers meet the fuel economy standards, Smith contended that regulators need to provide more incentives and infrastructure that support consumer demand for battery electric and hybrid vehicles. Additionally, the federal government should offer more “emissions credits” for introducing electric or hybrid technologies, off-cycle technologies, (3) and similar innovations in their vehicles than at present. In general, Smith said further discussions about the timetable for achieving the 2025 fuel economy targets should be held between industry representatives and federal regulators. In response to some of Smith’s points, Sousanis said perhaps the federal government might consider differentiating fuel economy standards by vehicle class (e.g., subcompact, mid-size and standard sport utility vehicle).

Concluding the conference was a conversation between Dave Andrea (Center for Automotive Research) and Joe Anderson (TAG Holdings). The conversation centered on the leadership style of Anderson, who serves as TAG Holdings’ chairman and CEO, and his 30-plus years of experience in the auto industry. Anderson said he always learned a lot about each business he purchased before setting expectations for his staff. Those expectations focused on the following aspects of the business: product quality, cost, technology, and delivery.

Focusing on the first item on his list, Anderson said he believes quality control systems should be installed before the production process begins. This way the quality control process won’t be perceived as just a corrective experience. According to Anderson, quality control processes, while costly in the short run, will have long-term positive impacts on throughput and financial performance. In closing, Anderson advised those in the audience to design and engineer their products to fit their consumers’ preferences.

Conclusion

Consumers are in a more favorable position to buy vehicles today than they were shortly after the Great Recession. This has boosted analysts’ short-term forecasts for automotive sales. However, the long-term sales outlook is less certain. While there’s proven demand for the latest vehicle technology, especially among young consumers, they may delay their new vehicle purchases because many of them have yet to form their own households. On the production side, growth is expected in Mexico and China. But not much production growth is expected for the U.S. Vehicle producers are striving to hit federally mandated fuel economy (and emissions) standards by model year 2025, but this goal currently seems unattainable. Despite producers’ ability to innovate more quickly than expected, they remain “nowhere near” on track to hit the 2025 fuel economy targets. More dialogue between auto producers and regulators is needed to ensure that the fuel economy standards are met in a timely and reasonable fashion. Finally, greater dialogue between management and workers, as well as between automakers and consumers, can help improve product quality and customer satisfaction.

Agriculture and the Economy: A View from the Chicago Fed

written by: Paul Traub

On Thursday, May 12, 2016, members of the Detroit Association for Business Economics (DABE) attended a presentation entitled “Agriculture and the Economy: A View from the Chicago Fed” by David Oppedahl, senior business economist, Federal Reserve Bank of Chicago. Oppedahl highlighted key trends in agriculture and their relationship to the broader economy. Farming and manufacturing of food and bioproducts comprise around 4% of the Seventh District’s economic activity in 2013. And this share has been growing in the past decade.

However, over the past century, agriculture has seen dramatic declines in terms of the number of farms and their workers. These trends have been mirrored more recently in the loss of manufacturing jobs. These changes have been difficult for the Midwest, which has a higher than average concentration in these sectors. Still, there also have been some economic advantages to the region as a result of booming productivity. For instance, corn and soybean yields per acre have about doubled in the past half century.

Productivity improvements have generated more than a doubling of agricultural output (given similar level inputs) since around 1950, meaning U.S. consumers have had to spend less and less on food—from 28% of spending in 1950 to 13% in 2015. At the same time, however, spending on health care has been rising, such that the total consumption of food and health care has remained fairly steady at roughly one-third of consumer spending. An argument can be made that as eating habits became less healthy in the second half of the twentieth century, there was a substitution into spending more on health care than food. So, today’s efforts to promote healthier eating in the U.S. and to grow farm income from local and organic foods in essence aim to turn back the clock on personal consumption patterns.

Another key aspect of agriculture is the role of exports as a vital boost to the income of U.S. producers. In 2015, 13% of the District states’ exports were of food and agricultural products (versus 8.5% for the nation). Until 2014, U.S. agricultural exports had been growing rapidly, in large part due to the expansion of markets in Asia. But in 2015 there was a decline in agricultural exports as the strength of the U.S. dollar and slower economic growth abroad contributed to a narrowing of the nation’s trade surplus in agricultural trade.

Not only has the slowdown in exports affected the profitability of agriculture, but there also has been a compression of profit margins as many prices for agricultural products have fallen more than input costs in the last two years. The USDA projects that net farm income for the sector will fall for a second consecutive year in 2016. This downturn has hit the Midwest hard, as seen in lower farmland values and cash rental rates (see latest issue of the Federal Reserve Bank of Chicago’s quarterly AgLetter). On November 29, 2016, the Federal Reserve Bank of Chicago will hold a conference to examine the agricultural downturn in the Midwest and discuss future directions for farming. Additional information about the conference will be released in the coming months on chicagofed.org.

To view Oppedahl’s slides from his Detroit presentation, please click here.

State of the global economy discussed at the Detroit Association for Business Economics meeting

On Thursday, March 17, 2016, members of the Detroit Association for Business Economics (DABE) were presented with an extremely in-depth presentation entitled “State of the global economy: Recovery, flat, or decline?” by Dr. David Teolis, senior manager, economic and industry forecasting—international, General Motors (GM). Teolis is a veteran economic analyst, with numerous years of experience analyzing international markets and forecasting automotive sales for GM. He has previously served as the president of the DABE.

Teolis provided his analysis on the following topics:
• The global financial crisis and how it exposed structural vulnerabilities (problems that cannot be addressed through monetary policy)—which have contributed to the weakness in the global economic recovery, especially for emerging markets and commodity exporters;
• Low inflation expectations and the risk of deflation in some economies;
• The divergence of monetary policies around the globe (for example, as the U.S. struggles to normalize interest rates, other major economies such as the Eurozone and Japan are implementing negative interest rates, which is contributing to volatile currency markets); and
• The plethora of political risk, which may complicate the assessment of these economic concerns.

Teolis highlighted numerous explanations for the recent slow pace of global economic growth (such as supply-side headwinds, a debt overhang, and a savings glut) that have been offered by world-renowned economists. However, Teolis said he thinks that “secular stagnation,” as posited by Lawrence Summers, may be the primary factor for weak global growth. Teolis stated that he believes that structural reforms around the world are needed to provide a positive shock to the baseline economic outlook while also providing a limit to the downside risks. While low interest rates and accumulating pent-up demand could provide a cyclical economic rebound, Teolis argued that the implementation of structural reforms will better position the global economy for strong and sustainable growth. Absent progress on structural reforms, the economies of the world could remain mired in a period of secular stagnation, with continued volatility in commodity and financial markets. Moreover, the myriad of political uncertainties continue to pose many risks to the outlook for the global economy, said Teolis.

To see the entire presentation by Dr. Teolis, please click here.