America's Secret Economic Engine: The Automobile?

Ok, the big caddy with radical fins is hardly a symbol of the new, energy efficient automobile,  but it may be emblematic of a key to American economic revival.

Despite its fall from grace, the auto manufacturing industry and its myriad ancillary contributors or spinoffs remains a central ahem, motor, of prosperity. Between American car companies and the growing number of transplants locating primarily in the southern US, the industry continues to generate a huge number of relatively high paying jobs - and the taxes and consumer spending that flow from them.

But since the oil shocks of 1973, the price of energy has whipsawed the industry and the rest of the economy. This may, however, be changing. While oilshale has captured all the attention, the rise in fuel economy coupled with the relative decline in driving have combined to make oil price increases less of a threat and car sales, even at a reduced rate, more of the economic stimulant its proponents have long claimed it would be. JL

Justin Lahart reports in the Wall Street Journal:

A forecast that U.S. road-fuel demand would drop 10% by 2030 despite vehicle numbers rising by 17%.

Higher oil prices threaten the U.S. economy, but not like they used to. North Dakota is a reason for that. Changes in America's car industry and driving habits are bigger ones.

Amid sectarian violence in Iraq, oil prices have risen, and it isn't hard to imagine them going higher. That is unwelcome for a U.S. economy still struggling to find its footing. Starting with the downturn set off by 1973's oil shock, higher energy prices have been a constant factor in U.S. recessions.

But the economy isn't what it was in 1973, or even in 2007, when rising gasoline prices added to strains on U.S. household spending power.

One difference is the shale boom. The U.S. now produces over eight million barrels of oil a day, up from five million in 2007. So when Americans pay more at the pump, more of what they pay ends up back in the pockets of other Americans. A shift in U.S. energy consumption toward abundant natural gas provides an additional offset.

But one of the biggest ways high energy prices affect the economy is through consumers' car-buying behavior. When gasoline prices rise sharply, overall vehicle sales go down. And because of the major role the automobile industry plays in employment, those sales declines can pack a lot of oomph. Think not just of the 2.5 million people who work at motor vehicle and parts manufacturers and dealerships, but the truckers who haul cars and waiters and bartenders who work near auto plants.

What has historically intensified this effect is that U.S. car companies' vehicle offerings have tended to have lower fuel economy than those of foreign counterparts. And because it is sales of the least efficient cars and light trucks that get hit hardest by higher gasoline prices, while sales of cars with the best fuel economy fare better, it is the U.S. auto industry, and all the workers and businesses that depend on it, that tend to bear the brunt of the hit.

But with more efficient offerings than in the past, U.S. car makers may capture more of the consumer shift toward higher-fuel-economy vehicles if gasoline rises further. The average vehicle sold in May got 25.6 miles per gallon, according to the University of Michigan Transportation Research Institute, versus 20.1 mpg when the recession began. In a report last week, consultant Wood Mackenzie forecast that U.S. road-fuel demand would drop 10% by 2030 despite vehicle numbers rising by 17%.

Moreover, foreign auto makers have expanded their American manufacturing presence, so more of any sales increase they see as a result of higher gasoline prices will end up in U.S. workers' paychecks.

Meanwhile, despite a 5% increase in the U.S. population, Federal Highway Administration data show that the distance traveled on highways in the year ended April was 2% lower than in the 12 months before the recession. Combine changing driving patterns with efficiency gains, and the American consumer is gaining a useful umbrella against global oil's storms.