According to traditional economic analysis, there are two sectors of the economy that warrant particularly close attention, due to their wide-ranging effects − new housing construction and motor vehicle sales. As for the first of these, one would have to be remarkably oblivious to be unaware of the problems in the U.S. housing sector, where there has been a 60% decline in the number of starts since January 2006. This has been the direct result of the subprime mortgage crisis.

A secondary effect, however, has been the drop in demand for autos in the United States and the accompanying shift in the kinds of vehicles that are selling. The change in the auto market is a general fall-out from the financial crisis. For example, there are personal loan defaults to go along with the mortgage foreclosures. Plus, individuals and families are finding it harder to purchase vehicles due to reduced levels of credit offered by the commercial banks. The banks are reluctant to lend except to the most creditworthy of customers. And they are looking for higher than normal interest rates, despite all efforts by the Federal Reserve to make credit more easily available.

Additionally, the high price of gasoline, established in the first half of this year, has caused a shift in demand from gas guzzlers to more fuel-efficient passenger cars. This came about due to record-high international oil prices, which hit $147 US per barrel in mid-July, before retreating to just over $100 US per barrel most recently.

That’s the U.S. What about Canada? The signs of difficulty in Canada’s auto sector are apparent almost everywhere. Exports of passenger cars to the U.S. market are -16% through the first half of this year. However, this pales by comparison with truck exports, which are down more than 50%. The “trucks” category includes vans and SUVs.

The Detroit Three automakers are facing wrenching adjustments, since most of their output is geared towards fuel-inefficient, but also high profit, large vehicles. Now they have to switch their platforms to more flexible production of lighter-weight more fuel-stingy vehicles. As for Ontario’s auto-sector towns, Windsor seems to be carrying the heaviest baggage, with just about the highest unemployment rate in the country and falling home prices.

There have also been developments on the labour front that suggest Canadian production may well be bypassed in the next round of investments by the former Big Three. This will be felt in two or three years time when the next major model changes are introduced. Heritage costs have been offloaded in the U.S. and concessions made with respect to wages and new hires to render UAW production at least as competitive as CAW work in Canada.

To counterbalance this, the non-union Japanese automakers have become firmly entrenched in Canada, making top quality cars in modern factories. Toyota is about to launch its new plant in Woodstock Ontario and this will add significantly to Canada’s role in the North American marketplace. Furthermore, the “parts” industry has grown larger than “assembly”, certainly in terms of total employment. This sector is under assault due to the increase in value of the loonie.

What may be most interesting with respect to the auto industry will be its impacts on other kinds of investment. For example, the shift to hybrid cars will add to projected electricity needs from the overall power grid. This is part of the push behind the surge in mega electric power projects that is planned across the country.

Material usage in car production is also part of the reason for the big uptick in steel and aluminum demand, not only in North American, but around the world. And Rio Tinto Alcan is planning major aluminum smelter expansions in Québec and British Columbia.

Another point of interest on the investment front is that reductions in auto traffic as a result of high gasoline prices have meant a falling off in revenues accruing to toll roads in some countries (e.g., Australia). The result is to make the financing of infrastructure projects somewhat riskier than had been originally thought.

A final comment is warranted with respect to the “emerging nation” phenomenon. Not only is there huge demand for motor vehicles arising in the likes of China and other newly industrializing nations, but there is the spectre of formidable competition on the production side. China has its Chery and everybody will be watching to see whether Tata Motors of India really can produce its highly-publicized Nano car for a sticker price under $3,000.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News.

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