US: Implications of the semiconductor shortage on auto production
|- The global semiconductor shortage has become even more pronounced over the past few weeks, and one of the most visible disruptions is in the manufacturing of motor vehicles.
- Semiconductors represent just 1.3% of the total inputs used by the domestic autos & parts manufacturing industries, but they are an essential component.
- Major domestic automakers have announced factory closures amid semiconductor shortages. Both Ford and GM have estimated the hit to earnings this year attributable to chip shortages is in the neighborhood of $1 billion to $2 billion.
- Motor vehicle & parts production accounts for 7.5% of total manufacturing in the United States, so a reduction in auto production would likely slice a few percentage points off manufacturing output this year.
- Production hurdles are occurring amid a surge in demand for automobiles and already exceptionally low inventories. The autos inventory-to-sales ratio at retail dealers has collapsed and has been hovering around the lowest levels since October 2001.
- The demand and supply imbalance is giving way to higher prices of both new and used vehicles, which will likely be a noticeable source of higher inflation this year.
- Production cuts may also lead manufacturers to temporarily layoff workers. But, if manufacturers forgo typical summer shutdowns, seasonal layoffs are also apt to be skipped and generate a bigger boost to employment growth this summer.
Macro Problems from Microchips
The economy is still on track for its fastest full year of growth in a generation, but it could be growing even faster if it were not for ongoing supply chain constraints. The backdrop of key material shortages and order backlogs was the subject of a special report last month, “Supplies Inspection.” Many of the emerging risks we highlighted in that publication have become even more pronounced over the past few weeks across a wide range of input components, arguably none more so than semiconductors. We revisit those themes here and attempt to measure how these worsening supply chain dynamics could impact our forecast for manufacturing production, particularly for autos.
The inevitable upward pressure on prices is a key risk. Input costs continue to rise broadly as evident in the prices paid component in the April ISM manufacturing survey shooting to its highest level in more than a decade. So far, automakers have been able to pass those prices on with some measures like auto prices hitting records for both new and used vehicles.
In the long run, the chip shortage may spur additional investment in domestic manufacturing to secure a stable domestic supply of these critical inputs. But in the short run, we see a clear downside risk for manufacturing output.
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