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General Motors Co
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AllianceBernstein Holding LP
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Toyota Motor Corp
Americans are slamming doors and kicking tires again. This year they’ve been buying cars and trucks at an annualized rate of more than 14 million vehicles, the strongest performance since early 2008. General Motors (GM) has boosted its 2012 industry sales forecast, Ford Motor (F) will add factory shifts, and Chrysler Group is stepping up hiring as demand rises. Automakers have rebounded since demand plunged during the 18-month recession that began in December 2007, which caused production cuts and mass layoffs and forced both GM and Chrysler into bankruptcy.
Now for the ripple effect. Government data show that motor-vehicle production contributed half of the first quarter’s annual pace of 2.2 percent economic growth. When an industry is expanding that fast, it lifts the fortunes of thousands of other companies. The auto resurgence—from assembly lines and dealerships to steelmakers, freight lines, and loan providers—signals the U.S. is headed for solid growth, says Joseph Carson, director of global economic research at AllianceBernstein (AB) in New York. “We’re starting to see the spark in the auto sector that was missing initially” during the recovery from the recession, says Carson, a former GM economist. “It tells you there’s a certain momentum. A whole host of areas could see the multiplier effect. We’re at the beginning of a very long and durable cycle.”
Contributing to the auto sales revival are rising employment, an improvement in consumer confidence, and a thaw in lending. Chad Moutray, chief economist at the National Association of Manufacturers in Washington, D.C., estimates each dollar spent in the industry triggers an additional $2.02 for the economy. Apex Tool & Manufacturing is benefiting from the trickledown as the maker of tooling, fixtures, and gauges used to manufacture glass and other products has seen an increase in auto-related sales since the last quarter of 2011. Glass for vehicles “is the one part of our business that’s on the rise,” says Apex President Terry Babb. “Everything else is sort of diminishing.” Conglomerate 3M (MMM), which makes fuel-system tuneup kits, beat analysts’ first-quarter profit estimates as U.S. auto and industrial demand cushioned slowing growth abroad. Rising car sales are helping generate the most business for railroads in four years: Data from companies including Union Pacific (UNP) and Norfolk Southern (NSC) show motor-vehicle shipments for the final week of March hit their highest level since June 2008.
Foreign companies also are responding to rising U.S. demand. Faurecia (EO), Europe’s largest maker of car interiors, said on May 3 that it will acquire an interior-components business in Saline, Mich. VW Credit, the U.S. finance arm of Germany’s Volkswagen (VOW), said in April it’s expanding its Libertyville, Ill., office and adding about 150 jobs through 2018. Toyota Motor (TM), the biggest seller of hybrid vehicles, said in early May that it wants to produce more Prius models as demand outpaces its U.S. target of more than 220,000 cars this year.
Toyota has also announced it will spend about $30 million to lift production of four-cylinder engines at its Georgetown, Ky., plant by August 2013, adding about 80 jobs. All this boosts U.S. manufacturing, which grew in April at the fastest pace in almost a year, according to the Institute for Supply Management.
One reason factories may remain a source of strength for the economy is low stockpiles, particularly of automobiles, says Conrad DeQuadros, senior economist and founding partner at RDQ Economics in New York. The inventory-to-sales ratio for motor vehicles—at 1.9 in March—is holding around last year’s average of 1.87 and is down from 2.39 in 2008, the peak since recordkeeping began in 1967, he says. “Given the combination of a low-inventory environment and the current selling rates, you could see continued solid growth in production,” DeQuadros says.
There are caveats. The gains in auto sales depend on continued improvement in overall employment. The jobless rate has been above 8 percent for more than three years, and payrolls rose by 115,000 in April, the poorest showing in six months, after a 154,000 gain in March, adding to concerns the labor market may be faltering. And even if the industry’s rebound continues, sales haven’t returned to the pre-recession level of 16.1 million in 2007. The industry’s current share of gross domestic product, at 2.8 percent, is well below the record 4.8 percent in 1968. While the pickup in sales and its potential to filter through the economy is clear to investors, auto stocks underperform the market as a whole. Investors are leery of making risky bets on an industry that was on the brink not long ago.
Still, a revival “obviously benefits everybody,” says NAM’s Moutray. “You’re not only helping outside the auto industry—the glass and steel and seat manufacturers—but you’re also helping the restaurant that’s on the corner next to all those facilities. It is going to continue to be a bright spot for manufacturing throughout this year and next.”
The bottom line: With production accounting for a big share of GDP growth, the auto industry is spreading its wealth to suppliers and their employees.