November 03, 2008
Another bad month for autos
To say that the U.S. auto sector continues to bleed may be an understatement. Maybe we should start talking about a severed artery.
Sales of domestically manufactured cars in October were down 27% from a year ago, while domestic light trucks (which includes the SUV category) were down 40%.
"If you adjust for population growth, it's the worst sales month in the post-World War II era" for the industry, said Mike DiGiovanni, GM's chief sales analyst, on a conference call. "Clearly we're in a dire situation."
So much for the theory that plunging gasoline prices would bring buyers back to the SUV lots.
Rising gasoline prices earlier this year unquestionably contributed to the slide of domestic autos in general and SUVs in particular in the spring and summer, and the lost income and jobs that resulted may have been the factor that tipped the economic slowdown into a recession. But national losses in jobs, income, and consumer confidence are now exerting a separate influence of their own, as consumers cut back wherever they can. Domestic automakers take the brunt of that second, more damaging blow as well.
Lost income from motor vehicles and parts subtracted 64 basis points from the 2008:Q2 GDP growth rate (quoted at an annual rate), and took another 80 basis points away from quarter 3 (see BEA Table 1.5.2). Today's numbers suggest that the fourth quarter is going to be significantly worse than that.
Posted by James Hamilton at November 3, 2008 07:31 PMdigg this | reddit
Bad as the sales numbers are for these companies, the rate with which they translate into balance sheets is even worse - due to operational gearing. Maybe this will provide some counterweight to the wholesale (retrospective) condemnation of the financial industry for putting on too much leverage. Suckers for certainty, as NNT might put it, were everywhere. Oh and I'm not counting myself out of this. I am just getting tired of all the lecturing in the American press and the artificial moral distinction between "Wall" and "Main" street.
Posted by: Anonymous at November 4, 2008 12:32 AM
I'd be curious as to the sources of the the failure of consumer confidence. It seems to me that extraordinarily restrictive credit policies constrained auto sales far more dramatically than high gas prices throughout 2008. For many consumers, auto purchases are financed with home equity loans -- a rapidly evaporating source of funding -- if it is not gone already.
I haven't listened to conference call but I would assume that unanticipated inventory build up was dramatic. I'd like to hear from anybody who did hear it.
Posted by: RJMacDonald at November 4, 2008 05:23 AM
So does this mean I can expect some great deals on autos going forward? Should I add to the deflationary spiral by holding out until prices fall even further?
Posted by: David at November 4, 2008 06:00 AM
Thanks Dr. Hamilton for the piece - yes it is bad, really bad. I work with parts makers and it is gloomier there than at anytime since I started doing business (early 80s).
One thing we all did in the 80s was try to push down fixed cost even if it meant increasing variable cost - something the autos are very slow to do, they usually do the opposite - throw more and more capital at something trying to squeeze out 'labor'.
Chasing 'operational leverage' is as crazy as chasing 'financial leverage' - as soon as you get a slow down the 'variable revenue' drops and the fixed cost is still there. Even if the 'fixed' has already been paid for (not borrowed) it still produces a loss - just comes out of 'equity'.
Many of these companies - US domestic, European & Asian - are all going to have to retarget their cost structures to a lower volume build, more variety (mixed model production) and probably less automation (more semi-automation or 'smart automation) to be successful in the new environment. WE did a lot of this in the 80s but it was all 'forgotten' during the heady daze of the SUV boom.
Posted by: dryfly at November 4, 2008 07:03 AM
Told'ya it's about the volatility, the threat of high prices is enough. Unfortunately, I'm still confident that people mistakenly assumed inefficient driving behavior that won't go away either. All in all, the spike in energy prices was a disaster. We'll get more fuel efficient technology out of it, but we'll lose time and safety. Increased congestion from this might even wash out any fuel efficiency.
Posted by: aaron at November 4, 2008 07:50 AM
Should we start an office pool on the dates when General Motors and Chrysler declare bankruptcy?
Posted by: Mike Laird at November 4, 2008 02:04 PM
The extraordinary credit policies are very recent in my experience. I run a small independent car lot after spending years working for the big boys. GMAC only a month ago or so severely restricted their credit policies. From 1993 to 2002, when I worked as an F&I Mgr for big new car dealers, I probably contracted several thousand retail sales and home equity loans were never more than a smattering.
I hope more of the large sub prime auto lenders pull out. Last month kicked butt for us. My main lender is a small privately owned bank with zero debt and a proven sub prime method. Business is looking good for us. People are still buying SUVs and trucks, just not new ones. In my relatively small town, we put up more gross profit on 24 cars than the Chevy dealer did on 33. I have two salesman pounding the lot and fielded calls from several salesman at the Chevy dealer looking for work. The game always remains the same with the players constantly changing.
Posted by: Hitchhiker at November 4, 2008 03:54 PM
I think the more telling statistic is the trend in the auto market as a whole. Even foreign brands, which, until now, had largely escaped the decline are being affected.
Posted by: Rohit Patnaik at November 4, 2008 04:03 PM
You though the SUV, light truck numbers were bad before. Wait until the "bad fuel efficiency taxes" start. The new gov will probably waste no time squishing the SUV sales to zero. A wise investor warned me once - until the stock is worth nothing it can indeed get worse. I feel for the folks in the auto business all the way through the food chain.
Posted by: Steve D at November 4, 2008 08:59 PM
SUVs are such a bad form of malinvestment that even if the government offered a $5000 rebate to anyone who buys a 34 mpg or better car, the money saved would still have been more than enough to pay for all those rebates. Think about that for a minute.
It's not just an extra few hundred billion dollars of gasoline that SUVs waste. It is also massive amounts of steel (consuming coal and nat gas) copper, plastic (oil), and many other raw materials that have all increased dramatically in price over the years.
Yes, giving everybody $5,000 just so they would buy a reasonable car instead of a giant SUV would have been more cost effective. I challenege anyone to do the math on it.
Posted by: Iconoclast421 at November 5, 2008 06:36 AM
Thanks for the comment on healthy versus unhealthy lenders. Your new shop sounds nimble and entrepreneurial and frankly a source of hope that we will find a solid bottom once the swamp is drained.
Posted by: RJMacDonald at November 5, 2008 07:16 AM
I've reposted fuel efficiency graphs and analysis.
In the late 90s, the positive correlation of fuel efficiency and price pretty much breaks down. This is probably due to reaching the efficient capacity of roads and large scale use of electronic controlled fuel injection and and improvements in transmission (e.g. continuously variable transmission CVT). The use of electronic controlled fuel injection and transmission improvements have decoupled the relationship of slow acceleration and fuel efficiency.
In the second half of this decade, the relationship of gasoline price and fuel efficiency becomes negative. This is likely due to oversimplified belief of �slow� being more fuel efficient. Slower speeds being more fuel efficient is limited to highway driving. Aerodynamic drag does not surpass the increased efficiency of higher operating speeds until about 55mph for typical vehicles (made before 1995). In addition, electronic controlled fuel injection and improved transmissions can mean that faster acceleration is often more efficient than slower acceleration. People often confuse the idea that slower highway speeds are more efficient with the idea that slower acceleration is, it often is not.
Posted by: aaron at November 5, 2008 09:02 AM
The u.S. auto industry lobbied hard against milage standards for light trucks, helping perpetuate an arms war on U.S. highways that has killed many Americans (See the work by Larry Summers' wife on the topic. According to the statistics, even pedestrians suffered) as well as fouling the air and contributing to dependency on foreign oil. They were partly forced to it by the artificially low yen that pushed them out of the market for cars (bought in part with 300 noncombat troops in Iraq). But the industry's behavior leaves little room for sympathy.
Posted by: don at November 5, 2008 09:41 AM
Don: I wouldn't raise this as a question of whether we should have sympathy. I only point out that however we got to this point, these developments have implications for the national economy.
Posted by: JDH at November 5, 2008 09:51 AM
But James, there are many things that have implications (with or without sympathy) for the national economy.
[Cows in India come to mind for reverential international comparisons.]
[Full disclosure: I'm a vegan except when it comes to dining with Republicans and other cannibals.]
Just a little bit nervous now sensing something wrong with the proposition that the health of the (not just domestic) auto industry has implications for the national economy. Not blatantly causal, but critically co-dependent, maybe?
And deserving of our national taxpayer's generosity? Possibly nationalization?
I refuse to eat beef...give me those bland slabs of tofu but don't make me a GM/Chrysler POW.
Posted by: calmo at November 5, 2008 09:44 PM
At $4 a gallon, the cost of my full sized truck was starting to be noticable.
But once again:
(15,000 miles)/(15mpg) = 1000 gallons per year
(1000 gallons)*($2.50 per gallon) = $2500 per year.
For anyone over median income, this is less than 5% of expenses.
Iconoclast, are you willing to chip in $15,000 for someone above median income to sell a usefull asset (that will be sold to someone else, and continue to be used)? Of your own dollars?
My truck will likely last another six years with basic maintenance. A twice-as-efficient car would cost $20,000 up front (I've never taken a car loan, and will not).
If I switch to a 30mpg lawnmower, I lose big:
Gas savings: ($1250 difference per year)*(6 years)= $7500
Capital expense: -$20,000
The next argument will be my miscellanious repair and maintenance costs are higher.
1) Not $12,500 higher. I get 5 years out of tires and Jiffy Lube charges my truck about the same as my wife's smaller vehicle.
2) What happens to my taxes and insurance (vs fully depreciated truck)?
Miscellanious repair and maintenance is nearly a wash.
Posted by: KevinM at November 6, 2008 05:30 AM
Nice work KevinM...and I'm sure GM now has shortlisted you for VP.
So where is the mistake(s)? Why are people buying the Prius lawnmower instead of the 450 Super Duty Motorhome and Boat Hauler Supreme?
Ebay Motors suggests it is the resale value...depreciation has bled through slaughtering the tanks but blessing the lawnmowers.
Lawnmower buyin people (not real men) have not comprehended your economic argument, have not bought the idea that your full size 450 will last 6 years, have stoned your asset with their grass-cuttin ways...so unfair.
But with gas headed to 40 cents/gal, you'll show them.
Posted by: calmo at November 6, 2008 10:04 AM
Its a 1998 and has never had a notable problem I didn't cause.
The mistake is not buying a 30mpg lawnmower.
The mistake is thinking everyone else should.
Posted by: KevinM at November 6, 2008 10:46 AM
You can't expect prii to continue to keep their resale value, it's based on emotional demand not number crunching.
Posted by: aaron at November 6, 2008 11:04 AM
I like your logic. We really should have higher fuel taxes.
Why do we need to bail out the shareholders and management for the sake of the economy? Why can't we let them go bankrupt and restructure? Isn't that the best solution? You're surely not suggesting that we subsidize SUV production? Or do you advocate import restrictions?
Posted by: don at November 6, 2008 12:24 PM
It appears don wants to inject sympathy into the discussion...like the GM/Chrysler boys who were just handed $25B (before the dust could settle on that $810B package) to "restructure".
And it appears calmo wants to inject fear and loathing.
(You gotta inject something to spice up this staid old economics, right Buzzy?)
Congratulations don on understanding Kevin's logic (compounding 2 great McCainisms should win me the Nobel, but not likely here). Let me bring Kevin's piece down (and parenthetically like this):
Its a 1998 and has never had a notable problem I didn't cause. (Such a Beaut! Are you in Marketing? This is worth real $. Scrap the traditional warranty 5yr/bla bla and insert this gem instead: May contain Operator-originated problems
The mistake is not buying a 30mpg lawnmower. (Ok, I'm ignoring the single period and running this one into the next sentence even though there is a whole line space...like this, to avoid the ambivalence.)
The mistake is thinking everyone else should. (The herd mentality is never as important as it is right here (see my vain attempts to find don's opinion of Kevin's logic?) and determining what kind of beast izat that you are riding, yes?
Well its the traditional and apparently dated, if not rotten, model.
Posted by: calmo at November 6, 2008 08:50 PM
You sound like a fun lunch date, I'd expect great conversation (as long as I kept quiet and nodded a lot). Here's my alternative summary:
Iconoclast421: Economy cars are more economical. The federal government should give people $5000 to buy them.
KevinM: It would not make financial sense for me to take that deal. Make it $15000.
Calmo: Your truck has no resale value and you are also part of a government-GM conspiracy. I challenge your security in manhood.
KevinM: Frequent resale is not my use model, and resent your assumptions.
Don: The federal government should make trucks more expensive to own.
Calmo: Everybody is stupid but me.
I have a 10-year old truck with over 100k miles. I think I can nurse it to 2014. I paid about $20k for it. It hass consumed about 7000 gallons of gas lifetime at about $15k. Only repairs were for collisions that would have totalled a lesser vehicle.
I am not wealthy, but $35k over ten years a tiny cost for something as important as transportation, especially considering I still own it and it still runs.
Subsidizing new, efficient cars will not take it off of the road. A big enough subsidy would only reshuffle ownership.
Adding a gas tax penalty might also reshuffle ownership. A big enough tax penalty would destroy anyone under median income. Economically, keeping the truck makes sense to me until gas gets to about $10. Gas at $10 would crush the US economy.
With these policies, we would be subsidizing inefficient production of inefficient cars (JDH's bailout article), and at the same time subsidizing their efficient competition (Iconoclast), and at the same time penalizing all drivers (Don).
Sounds like a highly managed system for transferring wealth from the general population to failing corporations and government regulators. How about government stays out of it and lets the market drive.
Posted by: KevinM at November 7, 2008 10:25 AM
Wow Kevin, I am not worthy of such a lengthy response...or this other (somewhat misplaced) flattery:
Calmo: Everybody is stupid but me.
Thank you...for your time (considerable!) and your thoughts (genuinely engaging) [QED I tell you!]...somewhat economical (compared to your truck, you are a marvel...and I am here merely to scrub for more gems (not operator errors I swear!) .
But skip the lunch date and know that I am not a conversationalist, not wealthy, would never buy a new vehicle, and, although I appear to dis "traditional", my children would tell you that I'm lovable but pre-traditional. "Cromagnon" they call it.
Well, to hell with them and their bicycle ridin ways.
I cannot be expected to go vegan overnight.
Posted by: calmo at November 7, 2008 11:35 AM
Allright. I'll let you keep your truck. But I would still like to discourage new buyers. I doubt if a sensible fuel tax (such as in Europe) would wreck the economy. It would surely help efficiency - you could use the revenue to raise the threshold for the income tax. Externalities of the type caused by gas consumption (including SUV's on the road) just cry out for Pigou's solution. (How did the opponents in your auto misadventures fair, KevinM?) Even Greg M. agrees.
It's hard for me to come up with a worse allocation of resources than 'loans' to the auto producers. I'd rather sink the money in a nice 500-ship navy.
calmo and KevinM - great entertainment value in your exchange.
Posted by: don at November 7, 2008 01:02 PM
Don, a gas tax would not help efficiency. A gas tax reduces consumption mostly by destroying productivity. Only a small part of consumption reduction comes from efficiency if at all. Recent trends indicate otherwise. Please see discussion in the comments at econlog.
Posted by: aaron at November 7, 2008 01:16 PM
"a gas tax would not help efficiency"
I should have been more specific. I was not referring to fuel efficiency, though that effect should also be present. I was referring to economic efficiency - the overall improvement in economic welfare. Gas is an ideal target for Pigou taxes.
Posted by: don at November 7, 2008 03:08 PM
Calmo, sorry I get out of hand sometimes.
Posted by: KevinM at November 7, 2008 06:12 PM
Don't get bi-partisan with me, KevinM. I cannot B budged from my belief that you are a marketing genius.
Seriously, where were you (in this best of all possible worlds according to Leibnitz [best of all possible philosophers...somewhat debatable]) when Joe the Plumber stole your spot?
Real progress was real retarded at that moment.
We shall recover...with your help, your example.
Now leave me alone...I can get up by myself.
Posted by: calmo at November 8, 2008 10:23 AM
Right now, gas is not a good target for pigou taxes. It won't be until the market is made more efficient. This decade (perhaps longer), fuel efficiency has been negatively correlated with gas prices (this has even been the case over the past few years while truck and suvs sales have plummeted.) We need make the market more efficient before a piguo tax will work. We need to manage traffic better and people need to understand how their cars work and how they affect traffic first. That might even be beyond their capabilities.
People are not responding well to gas prices.
Posted by: aaron at November 10, 2008 08:29 AM
We need make the market more efficient before a piguo tax will work.
What does this mean, exactly? i.e., who are "we", what do you mean by "the market", what do you mean by "more efficient", why does it need to be made more so before the pigou tax, etc.
From what I can tell, people are responding just fine to the mix of inputs they are receiving, of which gasoline prices are just one of many.
Posted by: Eric H at November 11, 2008 07:36 AM
I meant that people need good information before price pressure will improve fuel efficiency.
And I guess that doesn't really have to do with pigou taxes. Just a bit of confusion on my part.
The reason gas in not a good target for pigou taxes is that no one has proposed using the money to compensate people for gas consumption negative externalities. In fact, no one has really identified any actual ones yet.
And no, they/we are not responding fine. Fuel consumption has gone down slighty, because of destroyed productivity. Drivers have been becoming less fuel efficient over the last several years with rising gas prices despite a more fuel efficient mix of vehicles entering the fleet and driving plateauing and declining (which should reduce congestion).
Posted by: aaron at November 12, 2008 05:34 PM
SUVs cover a huge range of vehicles, from small, hybrid 28k SUVs that get 34 mpg that can be used to go hunting for winter meat in the mountains (as one of my military friends does with hers) to gigantor E85 65-75k SUVs that get 10 mpg, usually have 1 driver, almost always tow air, and are often found in cities taking up two or three parking spaces at once. I imagine the former will survive, the latter will not, just based on recession consumer preference for affordable, practical vehicles and limited replacement of contractor style light truck based SUVs since housing construction has tanked.
I don't know about drivers "been becoming less fuel efficient". How many more hamburgers per mile do Hummer drivers now have to eat compared to the last several years?
Posted by: Zero X owner at November 24, 2008 10:39 AM