Motor City Blues

Buying a new car is among the most expensive items for most households

By BBC Economics Correspondent Andrew Walker

Detroit and much of the state of Michigan really does depend on the car.

One thing that strikes a European eye is how few pedestrians you see.

And if the people of the Detroit area need their cars to get around, many of them also depend on the motor industry for their living.

This is an area that has more to worry about than most of the country.

Making motor vehicles is the classic example of what economists call a cyclical industry. That is, one whose fortunes vary sharply with the ups and downs of the economic cycle; one that prospers more than most in a boom, and suffers more in a downturn.

Consumer fears

The reasons are pretty straightforward. When times get tough, consumers become nervous.

They see neighbours and friends losing jobs and wonder how secure their own employment will be.

Many people depend on Detroit's motor industry for their living as well as for transport.

They become more cautious about spending, especially on expensive items that might involve a continuing financial commitment such as repaying a loan.

Buying or leasing a new car is one of the most expensive items for most households. And if they are nervous, it's a decision that can nearly always be delayed.

There is plenty of evidence that it has started to happen.

Bob Wheat runs a Ford dealership in Dearborn just west of Detroit, a short drive from the car maker's headquarters.

He says sales are down about 30 to 40 vehicles a month compared with a year ago. That is a drop of about 7%.

He says he has started to see some hesitation, some "wait and see" attitudes among his customers.

Production cuts

Sales and production are down sharply as the economy slows.

Paul Ballew, director of market research and analysis at General Motors, says production for the industry is down 20%.

It is partly due to weaker demand. It is also the result of high levels of stocks of unsold cars which the manufacturers are trying to reduce.

The slowdown is also starting to affect prices.

Dealers routinely offer customers special deals - cheap loans and discounts. But Mr Wheat says these offers are a little better now. He says customers are surprised by the deals they are getting.

Sales of trucks have been hit hard. Commercial vehicles are always particularly sensitive to the economic cycle.

They also tend to be hit more than car sales by high oil prices, which have been an issue for over a year.

Mr Ballew says commercial vehicles are a worry. As he looks at warning indicators, commercial vehicles are one flashing bright red for General Motors, he says.

Detroit motors on

So it is very striking that Detroit does not seem to be feeling all that gloomy.

Certainly there have been layoffs and there are more on the way, notably at Chrysler which in January announced plans to cut 26,000 jobs.

People are well aware that if there is a long drawn-out recession the motor industry will really feel the pain. But they don't think it will happen.

Mr Wheat says that for the time of year, Village Ford had a good sales performance in January.

He seems surprised by reports in the media of much weaker consumer confidence. He thinks the people doing the surveys can't be talking to his customers.

John Hoffecker, head of the motor industry operation at consultant AT Kearney says much of the coming reduction in the workforce can be achieved voluntarily.

The industry recruited heavily in the 1960s, and those people would be due for retirement fairly soon anyway.

And then there is the fact that sales and production are dropping from a very high peak.

Mr Ballew says that what he has seen so far is a moderate slowdown. Like most of the industry in the Detroit area, he is cautiously optimistic that it won't turn into anything worse.