It shouldn’t be this way. A pandemic-obsessed public, uncertain about the economy’s future, typically saves as much as it can, spends on essentials only, and shuts down purchases of things that can be deferred. These are usually large, lumpy goods, like vehicles. Guess again—auto sales were one of the fastest sectors of the economy to recover, and demand remains hot. Manufacturers can hardly keep up. What’s going on?

Demand for vehicles stateside—where most Canadian-produced vehicles end up—was scorching to begin with. Average monthly light vehicle sales racked up an annual pace of 17.1 million units in the six months prior to COVID-19, robust by any estimation. March sales plunged to 11.4 million units, and further to 8.7 million in April. May through July were uninspiring, but August zoomed back to 15.2 million units, and they haven’t looked back since. The November-February average was 16.3 million units.

Auto producers were among the most responsive to the crisis. Output in Canada dropped 91% overnight, sending shudders through markets and fuelling speculation of a repeat of the sector’s 2009-style near-death experience. The rapid rebound of sales triggered a restart in production that instantly earned the industry “most improved” bragging rights. They deserved it—this is a sector that is well-versed in shutdowns for retooling, model turnovers, plant refits and so on. Although this one was unscheduled, it went like clockwork. And as soon as needed, the reboot went just as well.

Or did it? Sales are high, but have headed down in February. A seasonal slump? Sorry, the numbers are adjusted for that. Worrywarts might say that it was inevitable, that sales have caught up to the COVID-19 reality. Well, they’d be wrong. Demand isn’t the problem here; it seems to be supply.

Manufactures never like getting ahead of sales. They like to aim for dealer supplies that average 60 days of supply at current sales rates. Across the lower-48, they’re just below that with car sales, but fewer consumer are buying cars; they’re more into crossovers, SUVs, light trucks, and yes, even vans. In these categories, days’ supply has swooned to just 45.

This is the worst supply has been since 2009, but it’s nothing new; lot inventories have surprised the industry, averaging just 51 days’ supply since last June—for this hot-selling category, producers have barely been able to keep up.

For an industry as responsive as this one, that’s not good. The problem isn’t organization; there seem to be shortages of key inputs. Soaring copper prices indicate how this and other base metals have recently been hard to get. At the same time, supply constraints in Asia have dogged the microchip industry—a potential show-stopper for vehicle producers. 

Vehicle demand isn’t likely to swoon anytime soon; employment in the United States is back on the rise, and consumers have a mountain of mid-COVID-19 cash stashed in easy-to-access bank accounts. All indications are that they’ll be back in full buying mode as soon as they get the all-clear. For auto producers, the supply problem is far from over.

Sounds like a nice problem to have. Not really—Canadian exporters of autos and auto parts recovered handily, rising to 110% of pre-pandemic exports by July. No other industry, with the exception of food, saw anything like it. Exports have since rolled back to 8% below the pre-pandemic peak, again, not because of demand—this is largely a supply thing. 

It’s a good thing, because nobody wants to contemplate layoffs at this stage of the game. Far from it; it seems like the industry is going to spend the next few months making up for lost time. In all likelihood, we’ll be back to the same pre-pandemic laments about capacity problems before you know it. 

The bottom line?

One of the greatest signals of the U.S. economy’s fundamental strength is consumer willingness to spend on big-ticket items, like vehicles. No, this isn’t some anomalous low-interest-rate bender; savings are high and liquid, and confidence isn’t in the quagmire that popular media outlets would suggest. This is great news for a key Canadian export sector, and indications are that it should have a great summer and fall in 2021. Can the Canadian auto industry feel the G-force already?


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