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U.S. Car Market in a V-shaped Recovery
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Thesis is WRONG
In a recent interview Ford CEO Alan Mulally sounded the V-shaped recovery optimism gong.
According to him U.S. car sales, after reaching a multi-year rock bottom in 2009 of anestimated 10.5 million units, will begin to stage a rapid recovery reaching 12.5 million in2010 and 14.5 million units in 2011. That is a 38% growth rate over the next 2 years!Is this possible or is he smoking the hope joint? Let us examine the facts:
Car Sales have Fallen off a Cliff
. Despite the government subsidy tonic and the V-shapedrecovery drumbeats, 2009 is setting up to be a record bottom in car sales. As shown in thechart below, U.S. car sales have collapsed a staggering 35% from a seasonally adjustedannual rate (SAAR) of 16.1 million units in 2007 to an expected SAAR of 10.5 million unitsin 2009.
Source: Deutsche Bank, Ward Auto.
Post Cash for Clunkers September Car Sales Have been Dismal
. After a brief, cash forclunkers extravaganza in July and August, car sales in the U.S. are rapidly
trending downagain
. In a recent CNBC interview, GM CEO Fritz Henderson revealed that industry wideU.S. car sales have weakened substantially in September. Sales are set to drop to a SAARof 9 million units (estimated) in September from the cash for clunkers fuelled high of 14.1million in August. At these levels September sales would be the lowest since April 2009 (seechart below).
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Source: Deutsche Bank, Ward Auto.
In fact, car sales in the U.S. are likely to remain low over the next several months as thecash for clunkers program pulled in demand from the future. Given that GMs breakevenpoint is 1.8 million units annually (so far they have sold 1.38 mm), it is no wonder that GMhas panicked into launching its next extravaganza a
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60 day satisfaction guaranteed or yourmoney back program
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. As Karl Denninger points out,why rent from Hertz when you can get
a GM vehicle free for 60 days?And if this grand plan does not work out, no worries, GM can try doling out even morefreebies. After all in this tax payer funded post-bankruptcy world what does GM have tolose?
Past Years Car Sales were a Bubble Created by Cheap Financing
. For the last decade,Americans bought cars like candy and why not? Every year car companies would unveil amind-boggling parade of gas guzzling models (remember the Hummer), encouraging peopleto trade up and they did. Americans began to change cars as often as they changed clothes.From 2000-2007, car sales ballooned to 16-17 million vehicles a year. A recent Vindy.comarticle titledCar-buying habits are Changing,captures this bubble fueled era noting that,
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During the boom years,
almost anyone
qualified to buy a new vehicle. Zero percentfinancing on purchases and cut-rate deals on leases kept monthly payments low andencouraged people to trade every three or four years
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.And given that 60% of Americans take out a loan to buy a car, how exactly was thismadness financed? On the cheap of course. People were encouraged to take out a secondmortgage on their home, or a home equity line of credit (HELOC). According to SynergisticsResearch Corp, in 2006 almost 24% of car and truck purchases were financed with aHELOC. The remainder of car loans that were bank financed were quickly bundled off as
3 http://firecracker-report.blogspot.comsecuritized loans to investors. With a booming housing market, low mortgage rates, thanksto Greenspan low interest rate policy of the early 2000
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s, and a rapidly expandingsecuritization market, cheap financing was plenty.
So Does the Future Look as Good as the Past? Not in a million years.
The Bubblefuelled car sales numbers of 2000-2007 now look to be permanently relegated to therearview mirror. Since March 2009, amidst all the cries of a V-shaped economic recoveryand a booming stock market, car sales have lagged badly. For almost all months of 2009,with the exception of July and August U.S. car SAAR has been stuck in the mid to high 9
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s,their lowest levels in a decade. Now that the July-August cash for clunkers is gone, car salesare trending back to their low 9
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s trajectory.In our mind there are three crucial factors that put a serious wrench in the V-shapedrecovery thesis for car sales:
1.
High Unemployment to Persist Well into 2011
: The official U.S. unemploymentrate currently stands at 9.7%, while the real unemployment rate U-6 has hit 16.8%and both are expected to rise much further. According to Paul Krugman, the NobelPrize-winning economist unemployment in the U.S. will not peak until early 2011because of a slow and painful economic recovery. Additional support for the highunemployment thesis comes straight from the horse
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s mouth, Atlanta Fed chief Dennis Lockhart. In a recentspeech he stated that prior to the recession,
construction and manufacturing combined accounted for slightly more than 15% of employment. But during the recession, these job losses made up more than 40% of all US job losses. He went on to say "In my view, it is unlikely that we will see areturn of jobs lost in certain sectors, such as manufacturing".So if folks
don’t
have jobs where exactly is the demand for cars going to come from?
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Real Estate Sector no Longer a Source for Credit
. Over the last decade almost aquarter of car sales were financed using home equity lines of credit. Today suchcredit is scarce, because many households have no equity left in their homes.Zillow.com reports that about 25% of U.S. homeowners are underwater on theirmortgage and this figure will rise to 30% by mid-2010 with increasing job losses andforeclosures. In addition, banks reeling from bad debt on their balance sheets havetightened credit substantially. With a glut of inventory from foreclosures coupled withweak consumer demand and tight financing, home prices are not going to attaintheir bubble heights for a long time. So home equity extraction will remain severelyconstrained.
3.
Securitization market is dead. Not even TALF can bring it back to Life
. Carloan securitization was a critical vehicle in maintaining a steady stream of cheapfinancing available. As investors bought securitized car loans, it freed up capital forbanks/finance companies to make new loans to consumers. Since the collapse of
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