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What's Going On With the U.S. Auto Manufacturers?
After Lehman Brothers fell apart, the U.S. auto manufacturers went to Congress and begged for help. Funding had dried up and they were worried about going out of business. Congress provided loans, but it was not necessarily the auto manufacturers that Congress was trying to help, but all of the key small to mid-size suppliers that would have gone bankrupt at the same time.
Politically, there was a lot of backlash against the deals. Yet, Congress constantly told the public that a stable auto manufacturing sector was necessary for long-term economic growth.
Fast forward to today.
The Cash for Clunkers stimulus plan boosted sales well beyond auto dealers' expectations. In addition, many key executives in the industry talked about a continued surge in demand for new vehicles.
We expected the increased sales projections would qualify for at least an equal increase in U.S. production that would not only replenish current sales, but also restore inventories to their normal historical levels. In turn, we thought the increase in production would not only drive up incomes for auto workers, but would also be a key component in driving economic growth as the U.S. pulls out of the recession.
So far, we have been wrong.
Auto Sales
Many economists, including this one, believed that the Cash for Clunkers stimulus plan would do a great job of boosting short-term sales at the expense of future potential profits.
As the public became aware of the program, auto sales did indeed surge as expected. However, for some unknown reason, the manufacturers were caught off guard. Inventories of high demand vehicles became extremely tight and dealers were left with empty lots.
In September, the first month after the stimulus plan, domestic auto sales plummeted from 10.19 million SAAR units to 6.80 million units.
While most economists believed that sales would remain at this level for a few months, car manufacturers continued to talk about demand returning extremely quickly.
They were right.
Sales of cars jumped 16.8% to 7.94 million units in October and sales were at the highest level since September 2008.
The increase in auto sales pushed retail sales up 1.4% in October as auto dealer revenues jumped 7.4%.
Without the addition of auto sales, retail sales would have only increased a very modest 0.2%.
Auto Production
We expected that the increase in sales coupled with low inventories and the start of the new model year would have boosted production.
Factories did come back on line in July and production rose from a historical low of 4.05 million units SAAR to 5.62 million units.
The increase in July was not due to the replenishment of inventories, as sales did not pick up until the end of the month. Instead, the jump in production was simply the end of the retooling process for the new model year.
Assemblies increased slightly more in August to 6.33 million units. The big jump occurred in September when the auto manufacturers began repeating claims about how demand was going to continue to pick up in the near term even after the stimulus ended.
September assemblies rose 13.0% to 7.15 million units.
Given the announcements by the auto manufacturers, we expected production to continue to rise in October, but this was not the case. Assemblies actually fell 4.5% to 6.83 million units.
The increase in sales in October, which the manufacturers accurately predicted, did not lead to an actual increase in assemblies.
The industrial production index for motor vehicle manufacturers fell 3.7% in October. Production by suppliers of motor vehicle parts, which was one of the big reasons for keeping the auto companies afloat, declined 0.1%.
Without a continued increase in production, auto worker incomes will continue to decline.
Auto Inventories
The inventory data lags the rest of the data by a month and the latest information available is for September.
Motor vehicle and parts dealer inventories rose 3.8% in September after declining 8.0% in August.
At this time it is difficult to determine whether the increase in inventories was due to the combination of the jump in production and decline in sales in September, foreign manufacturers replenishing their stocks, or domestic manufacturers increasing inventory levels by importing assembled cars from Canada and Mexico.
Sales of foreign automobiles fell from 3.9 million units SAAR in August to 2.4 million units in September.
At the same time, the value of imported passenger cars and parts from Japan, Germany, and Korea increased by $123 million. The increase in imports does not seem to be large enough to drive inventory levels higher.
Almost all of the imported passenger cars and parts from Mexico and Canada are from domestic brands. In September, U.S. auto manufacturers imported $1.2 billion worth of domestic cars and parts.
It is very likely that the increase in inventories was due to domestic manufacturers outsourcing the assemblies from the U.S. to Canada and Mexico.
Auto Prices
At the same time that a higher percentage of assemblies are made outside the U.S., the latest CPI report shows that the auto manufacturers increased their prices for the 2010 models.
While prices rose 1.6% in October from September, a better gauge is the price difference between October and July. Prices fell 1.3% in August due to the Cash for Clunkers rebate and did not normalize in September as manufacturers kept prices low to blow out 2009 model year inventories.
Still, even when controlling for the Cash for Clunkers price drop, prices for new 2010 model vehicles rose 0.7%.
Finished producer prices for passenger cars, a close proxy for dealer costs, fell 0.5% while light truck prices declined 5.2%.
The drop in producer prices coupled with the increase in consumer prices will allow U.S. auto manufacturers to obtain a healthy profit if sales stabilize.
However, in order to obtain that profit, auto manufacturers squeezed many of their suppliers and forced them to accept lower costs for their parts, thus shrinking suppliers' profits.
What It All Means
Even though auto sales surprised most economists, auto manufacturers claimed that they had accurately predicted the increase in demand.
However, the increase in sales may not lead to an increase in U.S. economic activity.
Production in the U.S. slowed in October and, at the same time, imports by domestic firms grew by 21.4%.
Auto manufacturers are set to have higher profits as they have been able to put pressure on suppliers to keep costs down while, at the same time, increasing the average sticker price.
While auto manufacturers are set to perform admirably if these trends continue, the incomes of U.S. auto workers and suppliers will continue to be depressed.
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