Detroit’s chip woes drag on U.S. economic growth

Workers are seen at the FCA Mack Assembly facility in Detroit, Michigan, USA on March 10, 2020. REUTERS / Brendan McDermid

October 29 (Reuters) – The US auto sector’s production slump this year is more than a big minus for Detroit – it’s a huge drag on the entire economy.

Gross domestic product growth slowed in the third quarter at just 2% annualized to the slowest rate in more than a year. That was less than a third of the growth rate of the previous quarter. Continue reading

While the delta variant of COVID-19 played a huge role as it swept the country in July, August and September, dampening consumer spending growth, the auto industry was the biggest weakness in Thursday’s sluggish GDP readings – by one Country mile.

Overall, the automotive sector deducted 2.4 percentage points from economic growth during this period. That was the greatest resistance Detroit had to US manufacturing in four decades – and one rare outside of a recession. The contraction caused by COVID-19 officially lasted only two months in the spring of 2020, and the economy has been in recovery mode since then.

Reuters graphic

The main reason the auto industry is facing difficulties is the global shortage of microchips, which are needed to run all of the complex systems of a modern vehicle. But as the global economy has recovered from last year’s stalemate, it’s not just the auto business that is chasing these chips, and they have become a global scarcity.

As a result, US auto production has declined in six of the past nine months and is at levels more likely to be associated with a recession. The September execution rate of 7.51 million vehicle assemblies was the lowest – excluding the short-lived slump to near zero during the COVID shutdowns – since 2010 when the industry bounced back from the financial crisis.

Reuters graphic

It also plays out in the US inflation picture. Chip scarcity is only one component of a complex puzzle of the forces that are driving inflation to its highest level in decades, but in the auto space it has turned price dynamics on its head like never before.

Because new cars are so hard to come by, consumers in need of a vehicle are offering prices for used cars. Once this spring, used car prices rose more than 10% per month for three months in a row.

This has been the main driver of the difference in inflation rates between new and used cars and light commercial vehicles in favor of used cars.

Reuters graphic

Reporting by Dan Burns; Editing by Daniel Wallis

Our Standards: The Thomson Reuters Trust Principles.

Comments are closed.