When August auto sales are reported today, they are expected to provide another sign that U.S. economic worries will challenge the auto industry for months to come, putting pressure on carmakers for further production cuts and profit-eating sales incentives.
U.S. consumers are too spooked about the housing market — specifically, the value and marketability of their homes — to be in the mood to buy new cars and trucks.
The Consumer Confidence Index fell to 105 in the latest survey of 5,000 households from a 112 reading in July, the Conference Board said last week. That was the biggest month-to-month drop since September 2005, when hurricanes Katrina and Rita caused a spike in gas prices.
Few experts interviewed for this story expect consumer jitters to be easily calmed anytime soon.
“The correction is going to take us through 2008,” said Paul Taylor, chief economist for the National Automobile Dealers Association, based in Virginia.
George Pipas, Ford Motor Co.'s top sales analyst, agreed: “We certainly see the conditions that we're experiencing now persisting well into 2008.”
That likely will mean lower auto sales in the United States until 2009, several industry experts said, and two years of nearly a million fewer car and truck sales annually than automakers have grown accustomed to.
Since 1999, the auto industry has averaged 17 million vehicles sold each year in the United States. But with the deteriorating economic environment, Detroit automakers and industry analysts have been downgrading sales forecasts for this year.
Taylor, for example, expects about 16.1 million cars and light trucks to be sold, down from an earlier projection of 16.5 million. Last year, 16.56 million cars and light trucks were sold in the United States, the lowest level since 1998.
So far this year, sales are down 3.2%. Through July, 9.5 million vehicles were sold, compared with 9.9 million during the same period a year ago. Last month, for the first time, General Motors Corp., Ford and Chrysler LLC also sold fewer than half of the new cars and trucks in the United States.
Now, experts are starting to forecast auto sales volumes for 2008 that don't offer much comfort. Erich Merkle, director of forecasting at IRN Inc. in Grand Rapids, is forecasting sales of 15.7 million vehicles next year.
“I hate to say it, but for the most part I'm expecting it to be pretty weak for the rest of the year,” he said.
Views on recovery mixed
George Magliano, director of North American automotive industry research at the research firm Global Insight, said he expects about 16.1 million to 16.2 million light vehicles will be sold next year, with no real recovery until 2009.
He said the fallout from troubles in the housing market indicate “a much slower and more-difficult economic environment than originally anticipated.”
Charles Chesbrough, a senior economist with CSM Worldwide in Northville, is forecasting 2008 U.S. auto sales of 16.4 million, which would be a slight increase over his forecast of 16.2 million vehicles for 2007. But, he said he might revise his number based on economic developments.
“The caveat to that is if the housing market doesn't turn around in the next few quarters … we do think auto sales are going to be hit” in 2008, he said. “We're going to be watching things closely.”
Mike Jackson, chief executive officer of AutoNation Inc., the nation's largest seller of new cars and trucks, said the market is so uncertain he cannot make a sales prediction for next year.
“Things are getting worse and worse and people don't know how bad it's going to get, so people are cutting back,” Jackson said. While Taylor is still working on his projection for 2008, he said the environment does not look good “unless we see some change in approach to the marketplace” by automakers.
That means incentives, such as cash-back offers and low-interest loans. GM has been boosting its incentives, which led Brian Johnson of Lehman Brothers to predict that August sales will not be so bad.
He said he expects the overall market to be down a little from last year, but better than June and July. He sees top Japanese automakers posting modest gains and Detroit automakers with small declines.
Housing, credit major concerns
But the industry still faces considerable challenges in the U.S. economy.
Even if the Federal Reserve lowers interest rates, as it is expected to do, consumer concerns likely will remain about the credit market, gasoline prices and basic household finances, which have changed substantially for many homeowners who have experienced a big bump in their monthly mortgage payment.
Also, a large portion of adjustable rate mortgages are scheduled to reset over the next 14 months, according to an analysis of reset schedules for ARMs by Credit Suisse. That also is leading homeowners to cut back and prepare for tougher times ahead.
“The world has changed for many households,” Pipas said last week.
No matter the actual number for 2008, sales volumes of between 16 million and 16.5 million do not bode well for the turnaround efforts under way at GM, Ford and Chrysler.
“It's definitely not something they need right now,” Merkle said.
Many experts predict the automakers will build fewer vehicles for the rest of 2007 and part of 2008 to compensate for the tougher market.
JP Morgan analyst Himanshu Patel told investors in a research note last week that “the large production cuts we are expecting across the board in 4Q07 and 2008 should have a material negative impact on GM and Ford, as well as on the earnings of North American suppliers.”
In an interview about the nation's economic climate, Peter Morici, a business professor at the University of Maryland, said it meant more tough times ahead for the Motor City. “Detroit is in very serious trouble,” he said.
