January 06, 2008
Ongoing slump in autos
The weak performance of auto sales continues, with a new twist.
We closely follow automobile sales as one of the key early indicators of how much of an economic impact there may be from consumer concerns over income and gasoline prices. U.S. auto sales have been weak for much of the last year, with total vehicles sold in the U.S. 2.5% lower in 2007 than in 2006. The pace of the decline accelerated slightly last month, with December-to-December sales down 2.9%.
Although this has become a familiar story, there is one interesting new development. For some time the trend has been that while total vehicle sales fell, sales of imported vehicles rose. Something curious happened last month, however, in that vehicles manufactured in North America actually gained market share relative to the imports.
|Monthly (Dec 2007|
over Dec 2006)
|Domestic light trucks||-3.5||-3.2|
|Imported light trucks||+3.1||-3.9|
Particularly noticeable were car imports (a category that excludes SUVs, which are counted among the light trucks). Sales of imported cars were up 1% for the year, but down 7.9% December to December, in perhaps another indication that the depreciation of the dollar is having some effect. If this proves to be a new trend, it's quite a welcome development. To the extent that some of the declining demand falls on imports, it mitigates the contractionary influence of the declining automobile demand, and is at least a step in the right direction for the huge current account imbalance.
Detroit is also trying to improve fuel economy, with GM dropping its plans for a new V8 engine and Ford announcing a new engine technology to improve fuel economy by 20%. But it's not clear whether any of these developments will be enough to keep the domestic auto industry afloat. You can buy Ford stock now for a little over $6 a share.
Posted by James Hamilton at January 6, 2008 12:05 PMdigg this | reddit
Don't read too much into the cancelation of the Cadillac V8. Quite frankly, the old Northstar V8 is a perfectly acceptable engine not in need of replacement.
GM has a stupid habit of coming out with new engines when the old one was perfectly acceptable. For example, by my count, GM has had 3 totally different 3.4 to 3.6 liter 24 valve v6 engines in the last 20 years.
That's just wasted money. Engineering isn't cheap. Better to take an existing engine and refine it (by, for example, adding direct injection, the technology that Ford is applying to get that 20% improvement).
Posted by: Buzzcut at January 6, 2008 06:59 PM
Car imports from developed world can save very little in form of trade deficit as trade deficit with advanced nations is very small. This is just calm in the storm.
Posted by: satish at January 7, 2008 12:49 AM
Posted by: M1EK at January 7, 2008 08:00 AM
I'm sorry, but i just don't get GM, or Ford, or Chrysler.
Here are GM's overall financials. It's trading at 23, after a -65 per share loss. It has huge unfunded obligations and has to compete with foreign makes that don't. Any engineer, manager, or machinist worth his salt will go work for a company that can pay him what he's worth WITHOUT deducting for payments to all kinds of people he's never met.
The net present value of these obligations more than wipes out any book value it has left. It's long term debt is trading at junk levels. Oh, and it's still in the blue-chip Dow 30.
It honestly looks to me that GM won't be around to honor a 10-year warranty, or at least I'll have to get in line with pensioners, fighting over the carcass for our due.
So, what am I missing?
Posted by: Person at January 7, 2008 08:54 AM
I suspect that the warranties and GM will live on long after it's first bankruptcy.
Almost nobody gets liquidated after their first adventure into insolvency, and there's no reason to expect that GM would be liquidated. For one thing, under Chapter 11 they'd probably be able to pitch the bulk of their pension liabilities over to the PBGC . . . . . not sure what that'd mean for the OPEB, but they'd be in a better negotiating position from Chapter 11 for all sorts of bad liabilities they're suffering from.
Also, I'm not sure I agree with the professor's use of the term "domestic auto industry". My last three vehicle purchases have been two Toyotas and a Honda, and each one was made in the USA -- not by a legacy auto company such as GM or F, which I think is probably a better term than domestic in the modern global auto industry.
Posted by: Anarchus at January 7, 2008 01:32 PM
There is no doubt that having a home market focused on small vehicles has certainly aided the Japanese manufacturers. Meanwhile, Ford and GM have had to drastically alter their product mix to react to dramatic increases in gasoline prices at the same time that consumers are experiencing a credit crunch.
There is also no doubt that the Japanese have far better ability to read the future U.S. market which is the reason that the planned Toyota Tundra was never built since it would have achieved less fuel mileage than a comparable-sized Ford or Chevy truck. Damn smart, those Japanese manufacturers.
About that Yen that stays so low and that closed Japanese home market....
Posted by: Bruce Hall at January 7, 2008 02:26 PM
Bruce, that would be more compelling if Ford and GM had ever displayed anything other than a violent and active hatred of buyers of small cars. Absent a few accidents like the early Saturns, Focuses, and whatnot, buying a small car from these guys was an exercise in masochism for the last 30 years.
This is most definitely NOT a case of "giving people what they want", either. GM and Ford (and Chrysler, of course, although not quite as much) willfully chose to ignore small cars despite there being a large and profitable market for them even when gas was cheap (did you see Toyota and Honda going broke then?)
Posted by: M1EK at January 7, 2008 02:32 PM
anarchy, the fine print suggests "autos manufactured int USA" includes some Honda, Toyota and other foreign based manufacturers.
JDH writes "Something curious happened last month, however, in that vehicles manufactured in North America actually gained market share relative to the imports." and points to the yen/dollar possibly being responsible for a trend hopefully starting with domestic manufacturing. But the entire industry is down 2.5% YoY and nearly 3% MoM if we needed to put that small glimmer of hope in perspective.
Posted by: calmo at January 7, 2008 04:06 PM
The other reason to watch car sales is for signs that credit problems are spreading out of the mortgage market. The seasonally adjusted data show only a very slow downward trend, which says that consumers are still able to get credit. That's good news.
Posted by: Bill Conerly at January 7, 2008 09:02 PM
Both GM and Ford have excellent European arms that have good small cars. They are as able to import small car designs from Europe as the Japanese are from their home market.
In fact, the Focus was just such an imported design. The new Saturn Astra is an actual import from a European GM factory. GM is also importing small cars from its Korean arm and marketing them as Chevys.
Of course, with the currency swings, importing from Europe or Korea is not as profitable as importing from Japan. Ford, in particular, has a much improved European Focus that it does not import. It so much as admits it would not be profitable. Instead, we get a mild refresh of the old model.
Also, seeing as how the Honda Civic and Toyota Corola are no longer compact cars, and the Honda Accord and Toyota Camry are no longer midsize cars, kind of goes to show that small cars are not even profitable for the Japanese. Even for them, bigger is better.
With that said, at least with a Honda Civic, you don't seem to pay any mileage penalty for the larger car. In fact, a non-hybrid, automatic Civic gets better gas mileage than that stupid little Smart car.
Posted by: Buzzcut at January 8, 2008 07:10 AM
Very good point Bill Conerly.
The SAAR data for December was unchanged from November and 4th Q sales were 16.172 M as compared to 15.925 in the 3rd Q. So the GDP and consumption data should show a pop in the 4th Q auto sales.
Posted by: spencer at January 8, 2008 07:13 AM
I presume that "violent and active hatred of buyers of small cars" is based on selling what Americans have traditionally demanded... and that "giving people what they want" means what you believe they SHOULD want.
My point was simply that the Japanese manufacturers benefited from the market movement to smaller vehicles because conditions in their protected home markets required the production of such smaller vehicles so they were ready to move in quickly with those vehicles.
My sarcasm regarding the Tundra as "giving people what they want" was obviously missed.
Posted by: Bruce Hall at January 9, 2008 06:24 AM
Buzzcut, both Honda and Toyota created new compact cars to fill the gap.
Bruce, no, I say that there were ALWAYS lots of Americans who wanted 'small' cars (Civic/Corolla sized, anyways) but that GM, etc. had no interest in selling any to them and did so begrudgingly at best. Had Americans not wanted small cars, Toyota and Honda would have gone broke - because when gas was REALLY cheap, that's still primarily what they sold.
Just look at the crap they foist on you now - Aveo and Cobalt, for instance - whose only reason for existence is CAFE; they're absolute disasters as cars.
Posted by: M1EK at January 9, 2008 11:02 AM
Buzzcut, both Honda and Toyota created new compact cars to fill the gap.
And those new cars are also growing in size from generation to generation.
It is shocking what Toyota did to the Scion xB, for example. They turned it into a gas hog! (okay, only relative to the old xB. But still!)
What's up with the Japanese compulsion to make every generation longer, wider, faster? The difference between the Japanese and Detroit is nothing more than excecution.
Posted by: Buzzcut at January 9, 2008 01:08 PM
Buzzcut, I was referring to the Fit and Yaris.
Posted by: M1EK at January 10, 2008 06:52 AM
While it is true that SOME Americans have always liked small cars, that has... until recently... been quite a small percentage of total demand.
Why, well, outside of a densely packed urban environment, there has been relatively little advantage for a small car and considerable advantage for a larger vehicle in terms of both safety and utility.
That's why, as Buzzcut observed, the Japanese have "upsized" their vehicles for the American market.
The government can certain force smaller vehicles on the American public. Many products have been forced by government decree... for example, restricted flow shower heads that people then defeat by removing restricters for "cleaning" purposes [some manufacturers provide instructions]. While some changes may be advantageous, the use of government mandates most often ends up in products with superior cost and inferior utility. The free market is far more effective in "giving people what they want."
But some devotees of "economics" don't like the idea of free market dynamics. They don't like the idea that Toyota could not convince enough people that the Yaris was better than the Taurus. They don't like the idea that the full-sized Tundra replaced a 3/4 sized one... because Toyota couldn't locate all of those Americans who wanted the 3/4 sized one.
Yes, the government knows what Americans want and will force them to have it. That will make a FEW Americans very happy.
Posted by: Bruce Hall at January 10, 2008 11:23 AM
Bruce, the only 'force' involved was that the government subsidized SUVs at the expense of station wagons through the last round of CAFE (and the odious depreciation deduction available only for the porkiest SUVs).
Nice attempt to rewrite history, though.
In a subsidy-free environment, CAFE wouldn't exist, but gas taxes would be a couple bucks per gallon - to pay for ALL major roadway construction (instead of subsidizing suburban drivers by urban drivers' gas, property, and sales taxes) and the military presence in the Mideast, for instance. What percentage of suburban commuters do you suppose would freely choose SUVs in that environment?
Posted by: M1EK at January 11, 2008 06:50 AM
Would be, should be... talk about rewriting history.
History is as it is.
Let's look at your premises:
1. Urban drivers subsidize suburban drivers through the gasoline tax. Both pay the same rate per gallon. If the urban driver drives fewer miles and has a smaller car, the suburban driver is paying for more of the road maintenance or other uses of the gasoline taxes.
2. Property taxes are unrelated to gasoline prices unless you make the stretch that people live in the suburbs rather than cities because they can afford to drive. Actually, the high property prices, poor government, and high crime rates have driven most people out of cities to suburbs regardless regardless of the vehicle they own.
3. Military presence in the Middle East, global warming in central Asia in January, too many people in the southwest for natural water supplies, cutting down tropic forests to grow alternative fuel palm oil... oh, gosh, the list is endless of IRRELEVANT actions.
Come on Mike, it's time to study economics, not socialist theory.
Posted by: Bruce Hall at January 12, 2008 11:13 AM
Bruce, I was referring to the fact that the urban driver spends more of his/her driving time on streets which don't get any funding from the gasoline tax - and instead must be funded locally, which usually means property taxes. For instance, I spend less than 20% of my miles on the "state highway system", which in Texas is the only place gas tax monies can be spent. My suburban friends drive more like 80-90% of their miles on such roadways; yet we both pay exactly the same gas tax (per gallon).
If you're this uninformed about road funding issues, allow me to suggest that you do some reading.
Posted by: M1EK at January 14, 2008 07:36 AM
If you drive 5 miles on city street and use 10 gallons of gas per week and your suburban counterpart drives 5 miles on his town's streets and 30 miles on highways and uses 30 gallons of gas per week, he is paying more IN ABSOLUTE DOLLARS for taxes that go toward both federal and state roads... and his property taxes go toward city streets.
The fact that you pay the same rate is irrelevant.
You logic is illogical.
Posted by: Bruce Hall at January 14, 2008 04:58 PM
Bruce, the suburbanite doesn't pay as much for city streets because suburban areas are far less likely to HAVE major streets. He drives 90% of his miles on "gas tax roads"; I drive 10% of mine on "gas tax roads"; but we both pay gas tax 100% of the time, and my property/sales tax bill is higher for the 90% of my roads that aren't gas-tax-funded. Get it?
Posted by: M1EK at January 15, 2008 06:21 AM
Perhaps where you are located all suburbs have 2 lanes. In my area, suburbs are simply an extension of the city and have major thoroughfares.
Regardless, your assertion that the fewer miles you might drive as an urban driver still requires too much in the way of gasoline taxes or property taxes does not calculate. We all pay taxes whether we get direct benefit or not. I have no children in school, but have to pay school taxes. While some might argue that I benefit from good schools keeping property values higher, I might argue that my property taxes also go into a general fund for my state and that helps urban freeloaders who chose the largess of the state rather than the rigors of a job.
This has moved way off target anyway. My original point still stands: There is no doubt that having a home market focused on small vehicles has certainly aided the Japanese manufacturers. Meanwhile, Ford and GM have had to drastically alter their product mix to react to dramatic increases in gasoline prices at the same time that consumers are experiencing a credit crunch.
And my subsequent point still stands: There is also no doubt that the Japanese have far better ability to read the future U.S. market which is the reason that the planned Toyota Tundra was never built since it would have achieved less fuel mileage than a comparable-sized Ford or Chevy truck. Damn smart, those Japanese manufacturers. [read the sarcasm]
All the talk about how many people in the U.S. market wanted small vehicles and how the U.S. manufacturers didn't produce what "the people" wanted is merely a distortion of history and a poor attempt to challenge a market-driven approach to automobiles or anything else and replace it with Soviet-style central planning, aka CAFE.
Posted by: Bruce Hall at January 15, 2008 10:49 AM