Auto Sales Are Tanking! Does Anyone Remember The 1990 Oil Shock?

Implications: It's instructive to compare what's currently happening in the auto sector and the U.S. economy with what we saw in the wake of the 1990 oil shock.

Analysis: A capsule look at auto sales for 2008 shows sales of light trucks manufactured in North America, which category includes the once mighty SUV, depressed, with July sales down 26% compared to last year.

Domestic car sales are down 6.4% from last year, and again, July of 2007 was unrepresentatively weak. Sales of imports are doing much better.

Looking back to 1990, we saw very much the same pattern: the oil shock saw an abrupt drop in the demand for Detroit's money makers, and a shift into more gas-stingy imports. The resultant hit to profits in the auto sector is one mechanism whereby an oil price increase can contribute to an overall U.S. recession.

It's interesting to compare what we have observed so far this year with what happened during the oil price shock and economic recession that followed Iraq's invasion of Kuwait in August 1990. With the loss of oil production from both Iraq and Kuwait, the price of oil shot up quickly, nearly doubling between July and October, after which it fell back down almost as dramatically.

By contrast, the oil shock of 2008 has been a more gradual affair, caused by booming demand from China confronting stagnating global oil production. Although he price increases have occurred more gradually, in percentage terms the cumulative change in oil prices over the last year is almost as big as we observed in the fall of 1990.

In terms of the consequences for auto sector employment, the number of U.S. workers employed in motor vehicles and parts fell by 62,000 workers in the month of November 1990, with a cumulative loss of 94,000 auto jobs before the recovery began in April 1991. By comparison, auto employment this past year fell by 83,000 workers, cumulatively about the same size disruption as in 1990, but spread out over a longer period, and , affecting a larger percentage of the diminished UAW workforce.

In terms of effect on GDP, the contribution of motor vehicles and parts to real GDP fell by $15 billion between 1990 Q4 and 1991 Q1. That corresponds to about 0.2% of GDP each quarter, or a hit to the annual growth rate of real GDP of about 0.8% each quarter.

Again, the overall magnitude of the response we've seen in autos this year is comparable to that in 1990, with the sector subtracting $12 billion (in 2000 dollars) from 2008 Q1 real GDP and an additional $22 billion from 2008 Q2.

Of course, autos are not the only sector where we see significant shifts in spending as a result of the sharp increase in the price of oil. Airlines and tourist dependant sectors are also hit hard. Even so, the oil price increase in 1990 was not enough by itself to cause the recession, but may have been the factor that tipped an otherwise wobbly economy into freefall.

As Yogi Berra might say, looks like deja vu all over again.