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Last Updated: Thursday, 24 January 2008, 08:56 GMT
Idling engines hint at US economic woes
By Jorn Madslien
Business reporter, BBC News, Detroit

Car-loving Americans have been flocking to Detroit's glamorous auto show this week to see the automotive future for themselves.

Detroit auto show
Show visitors love to browse, but many are loath to buy

That future may well be bleak, in spite of the shiny cars and trucks on display.

Although no longer the major engine for growth in an economy increasingly powered by the service sector, the US automotive industry is still seen as a barometer of the economy's health.

Too bad, then, that its outlook is so gloomy.

"We're really facing some challenging economic times," says Paul Traub, senior manager, economics and industry analysis, Chrysler LLC. "We're in a more difficult time this year than what we may be feeling right now."

Double whammy

Economists representing the three US auto makers, General Motors, Ford and Chrysler, agree that cars and trucks are getting cheaper.

US light vehicle sales

"Automotive vehicle prices are decisively in the negative territory," laments Ted Chu, lead economist in global market and industry analysis at General Motors.

"We don't expect that situation to change drastically, given the intensive competition we have in the market place."

Selling cars and trucks, a category that includes pickups and sports utility vehicles, for less money is painful for the auto makers.

Not least given the fact that the price cuts are doing little to boost sales, which are predicted to fall quite sharply this year to below 16 million units for the first time in years.

"Our best guess is something around 16 million; that would be around 15.7 million for light vehicles," predicts Ellen Hughes-Cromwick, director and chief economist at Ford Motor.

Wealthy drivers

In suburban Detroit, car and truck dealers have seen it coming for some time.

US new vehicle spending by income bracket
The wealthiest fifth of the US population account for 40% of spending on new vehicles
The poorest fifth account for 5% of the total spending on new cars and trucks

"Michigan's been a one-recession state for a while," explains one local Ford dealer who wants to remain anonymous, "so customers are a bit more cautious right now."

"Everything's on their mind right now. They're worried about their [monthly] payments, they're worried about their jobs."

America's so-called sub-prime crisis, which has led to falling house prices, is also weighing on sentiment.

"We think there's a continued acceleration of mortgage defaults," predicts Mr Traub.

This too is hitting sales, though again largely because it puts people off spending even if they have the cash. After all, the ones that are hit the hardest by the sub-prime crisis are the poorest fifth of the population. This group accounts for no more than 5% of new car and truck sales, according to figures from Ford.

In contrast, the richest fifth of the population accounts for 40% of new vehicle sales.

Nervous consumers

While there is intensive fear in the financial markets, fear itself does not generate a recession
Ted Chu, economist, General Motors

You see it in the driveways in Grosse Pointe, a wealthy suburb to the east of Detroit where expensive cars and SUVs line the driveways: falling vehicle sales in the US do not necessarily mean that customers are running out of cash.

Rather, weak sales are seen as a sign that many Americans are becoming nervous about the future and therefore tightening their purse strings.

"The saying in the auto industry," says Mr Traub, "is that it's one thing to have money and another to be willing to part with that money, at least to commit to the purchase of a automobile."

"The sentiment out there is getting hammered," agrees Ms Hughes-Cromwick, pointing to:

  • the seizing up in the credit markets
  • high and rising energy prices
  • a long period of high food and rising food prices
  • a very severe downturn in the housing market.

"Food prices are growing well above 4% and that is having an effect in terms of discretionary income," Ms Hughes-Cromwick observes.

And people are finding that "a larger percentage of their disposable income is going towards servicing their debt" as well as to put "heat in the house and gasoline in the tank", adds Mr Traub.

In fact, US drivers currently spend more than 4% of their wages on petrol, up from less than 2% in 2001, according to figures from GM. Consequently, concludes Mr Chu, they have "less money left to pay car loans and to spend on new vehicles".

Overly gloomy?

During previous recessions, Michigan has been ahead of the curve, recalls the Detroit Ford dealer.

Chrysler's cowboys drive a herd of cattle through Detroit
America's consumers can only hope the bulls, or optimists, are right

In the past, he points out, the state has slid into recession earlier than the rest of the US, only to be the first to bounce back.

But he also acknowledges there are no guarantees that history will repeat itself.

Indeed, the rest of the US may avoid a recession altogether, and the growing army of doomsayers may be wrong, points out GM's Mr Chu.

"Recession was predicted, as you may recall, back in 1998, and going back to 2005 during the [Hurricane] Katrina crisis," he says. "Economists have predicted about 13 recessions for the last three recessions.

"While there is intensive fear in the financial markets, fear itself does not generate a recession."

During press preview days at the auto show last week, where Chrysler's cowboys drove a herd of Texas Longhorns down Washington Boulevard, the industry was clinging on to such optimistic sentiments.

This week, the American consumer can only hope the bulls will come out on top.

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