US relies on carmakers to steer it from recession
Jeremy Grant and Peronet Despeignes writing for the Financial Times:
Barely a week after the September 11 terrorist attacks, a delegation of top policymakers from Washington flew to Detroit, the world's automotive capital.
Their mission: to see what America's Big Three car makers - General Motors, Ford and Daimler Chrysler - could do to keep the wheels of the US economy moving.
GM responded with a sales drive called "Keep America Rolling". The scheme, quickly mimicked by GM's rivals, used interest-free loans and "cashback" offers more generous than at any time since the schemes were introduced in the 1950s. The idea was, according to one motor executive, to "get people off their couches watching CNN and get on with life".
Ford on Friday extended cashback offers on a range of vehicles, increasing the amount available to consumers for its legendary Mustang to $2,000 a vehicle. "We have the potential to continue doing this for as long as anybody," says George Pipas, a Ford spokesman.
Few would have guessed that almost a year later, Detroit's role as a patriotic cheerleader would have been transformed into helping prop up the US economy.
"They [the carmakers] are bankrolling this very tenuous, fragile recovery," says Sean McAlinden, chief economist at the Center for Economic Research in Michigan. "There's been no government recovery plan. Alan Greenspan [Federal Reserve chairman] is holding off on any further [interest rate] cut."
Official figures released this week have all but suggested that the US economy in recent months has been hanging by the twin threads of home buying and zero per cent financing from carmakers.
The commerce department said on Tuesday that consumer spending rose by 1.2 per cent, largely driven by a surge in car sales on zero per cent financing schemes. Excluding car sales, consumer spending rose by 0.2 per cent.
The US housing market has been buoyed by mortgage re- financings as homeowners have taken advantage of low mortgage rates.
On Thursday, the Federal Reserve said US industrial production grew by 0.2 per cent in July, but that this was largely due to the effect of vehicle financing schemes that had lifted vehicle production. Americans on average own 1.2 vehicles per person compared with only 0.6 per person in Europe.
The fact that retail sales and output outside the vehicle sector have been stagnant does not trouble some economists. William Cheney, an economist with John Hancock Financial Services, predicts that as long as employment does not shrink significantly, "people will go on spending, but there isn't much pent-up demand to fuel a burst of growth".
But, with the US car industry accounting for about 4 per cent of the country's gross domestic product, how long can Detroit keep incentives going?
Its continued use of them has in truth more to do with preserving market share than with gestures of patriotism.
The big US carmakers are trying to catch up with their Japanese rivals on quality and have no choice but to preserve market share by selling on price - hence the incentives. The Big Three are also fighting one another in an industry that is mired in over-capacity.
GM, which is offering five-year, interest-free loans on 11 of its models, spent much of the past decade building leaner manufacturing processes and is best placed to carry on funding incentives. Bob Lutz, vice-chairman, said the company was generating cash flow "substantially in excess of what our budget assumptions were at the start of the year". Ford insists that, with $25bn in cash at its disposal, it can match any GM scheme.
The crunch for the wider economy is likely to come next month, when the existing incentives expire. However, there are also other concerns. Some economists believe that the incentives have set the stage for weakness in the months to come.
The biggest unknown, says Saul Bellew, a GM spokesman, is the broader economic backdrop. He says sales of GM vehicles to retail consumers are likely to be up by 1-2 per cent compared with last year.
"The problem we would have right now is if we saw further deterioration in the economy," says Mr Bellew. "Then all of our actions become pushing on a string."
My first car was a 67 Mustang Coupe, 2nd one was a 67 Cougar XR-7, 3rd one was a 66 Mustang Coupe. Why did I get rid of these cars for ? I know why, because I'm stupid, stupid, stupid.
My next Ford.....