Trump’s auto trade war adds to US demographic and debt headwinds

President Trump’s auto trade tariffs are bad news for the US and global auto industry, as the chart highlights:

  • It shows H1 sales in the 7 major markets, which account for 87% of global volume
  • Sales in China have risen nearly 4x since 2007 from 3.1m to 11.8m this year
  • Sales in the other 6 markets are almost unchanged at 23m versus 22.1m in 2007

Formerly high-flying growth markets such as Russia and Brazil have disappointed.  Even after this year’s recovery, their H1 sales were still 35% – 39% below their 2011 peak.

Growth in the mature markets of the USA, Europe and Japan has only been achieved via $tns of stimulus programmes, which have left all 3 areas with vast debt burdens. Now, of course, higher interest rates are causing sales to slow again.

Only China – and India, with its very young population and relatively cheap prices – has seen steady sales growth.

Equally important is the global nature of the auto industry supply chain, where parts manufacture is as important as final assembly.  And as the New York Times reports:

“General Motors now sells many more cars in China than it does in the United States, and the largest exporter of cars from the United States by value is not an American brand, but BMW. By some calculations, the car with the highest proportion of United States and Canadian-made content is the Honda Odyssey — and even that includes roughly a quarter of foreign-made parts.”

The sanctions couldn’t have come at a worse time for the US industry, where domestic steel and aluminium users are already suing the Administration over Trump’s earlier tariff decisions.  Higher prices will only accelerate the current decline in domestic auto demand, which is being hit by 2 major negative trends.


The second chart highlights the key longer-term issue, that Americans are driving less each year:

  • It shows annual US vehicle miles/adult versus the $/gallon gasoline price since 1970
  • Historically, Americans tended to drive more each year, unless gasoline prices rose sharply
  • Average miles driven rose from 8k miles in the 1970s to 11k miles in the 1980s, and 13k in the 1990s
  • The BabyBoomers (born 1946-64) were moving out to the suburbs and having children – so the “automobile was king”
  • Higher prices during the 1973-5 and 1980-85 oil crises slowed the trend, but didn’t change it

But in 2001, the oldest Boomers became 55, when people leave the Wealth Creator 25 – 54 age group which drives economic growth.  Average miles per adult peaked in 2004 at 13.3k miles and have since fallen by 1k to the current 12.3k level.  Mileage is back at 2011 levels, when gasoline prices were a third higher at nearly $4/gal.

The issue is that the ageing Boomers no longer have to drive to work each day, or provide a taxi service for their children.  And car ownership is no longer a key “rite of passage” for younger Millennials.  New business models (eg Uber/Lyft services and car-sharing) are far more affordable, given the high costs of car purchase and insurance.


The third chart confirms how US auto sales have become dependent on rising levels of debt:

  • It shows average auto loans based on the total over-16 age population (most Americans can drive from 16)
  • The average loan was already rising in the Boomer-led SuperCycle, with each peak higher than before
  • But the Fed’s subprime and QE bubbles have caused it to accelerate
  • In 2006, it averaged $4k at the height of subprime bubble; since the crash, it has risen back to $3.8k
  • The QE bubble was great news for US auto sales at the time, as was subprime.  But now. interest rates are rising again.

Unsurprisingly, used-car sales are now increasing.  They were 3.4m in July versus 3.2m in June and the tariffs mean they have a growing price advantage versus new cars.  As the PureCars CEO noted:

“Prices for new cars are on the rise, and as leasing continues to grow in popularity, prices continue to go down in the used car market. Put simply, used cars are often the most realistic purchase for car shoppers.”

President Trump’s trade wars confirm his transactional approach to complex issues.  As he told Fox News last month:

“You know, the cars are the big one.  We can talk steel, we talk everything. The big thing is cars.”

But tariffs are not a “silver bullet” and cannot solve the two key issues facing the US auto industry:

  • The “demographic dividend” of the SuperCycle has been replaced by a “demographic deficit”.  Ageing Boomers are not suddenly going to start driving more, whilst affordability issues mean younger Millennials cannot “fill the gap”
  • Rising debt levels only gave the economy a “sugar high”, which is now ending as interest rates rise

As with the stimulus programmes, they will instead simply make it more difficult to develop the new policies needed for success in today’s New Normal world.

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