CHICAGO - Each year, Cherokee Publishing, which issues Auto Remarketing magazine and other industry publications, hosts several conferences related to the used car business. This spring, president Ron Smith and his staff decided to expand into covering the economic picture - both generally and in terms of the automobile business. Therefore, in May, a far different group of attendees checked into the Marriott Hotel in downtown Chicago for the first-ever Automotive Economic Forecast and Financial Forum.
A distinguished group of economists, analysts, and others experts delivered presentations at the conference, including:
• Ellen Hughes-Cromwick, chief economist, Ford Motor Company
• Mark Vitner, managing director and senior economist, Wells Fargo Securities
• Bernard Swiecki, director of market analysis, Center for Automotive Research (CAR)
• Sudarshan Mhatre, senior analyst, PricewaterhouseCoopers, Autofacts
• William Strauss, senior economist and economic advisor, The Federal Reserve
• Melinda Zabritski, director automotive credit, Experian Automotive
• Tom Kontos, executive vice-president, customer strategies and analytics, ADESA (a major auction group)
• Matt Traylen, chief economist, Automotive Lease Guide (ALG)
• Dealer Panel that included: Tim Trosclair, used vehicle director, AutoNation; Tammy Darvish, president, DARCARS:(DC area) Automotive Group; and Joe Castle, dealer principal, Castle Dealerships (Villa Park, IL)
Below are selected highlights from the major presentations:
"We've seen a lot of stabilization in the credit markets, the finance market," Hughes-Cromwick said. "Some of those people will eventually be able to get back into the market." For now, "they're only just starting" to feel confident. There's not yet a "normal appetite for consumer lending." Banks remain cautious about lending, and potential shoppers who are concerned about a job aren't likely to come into the showroom.
"We have seen fleet sales improve quite a bit," Hughes-Cromwick said, observing that "I think we are on the cusp of a recovery" for small business. "I think the fiscal stimulus has been [favorable] for small business." Rental fleets with high-mileage stock are "in need of replacing their vehicles at this time."
Ford plans to produce small, medium and large vehicles, Hughes-Cromwick said, to sell in "as many markets as possible." Rather than emphasizing trucks, "we have this balanced portfolio," cars through trucks
Asked about the prospects for smaller cars, she said: "I think it's going to be very interesting" to see what happens, adding that "good fundamentals support that." Especially among the young, she can see "interest in a smaller package," and not just during a $4/gallon gasoline period. "I think we will see a variety of demand in the marketplace," she advised. "We know that there's a variety of buyers out there."
About 60 countries are at "takeoff stage" now in terms of development, Hughes-Cromwick said, and China is far ahead of the pack. Including heavy trucks, China is selling 14 million vehicles per year. At this point, two regions out of three in China "have achieved that per capita income" where vehicle purchases are possible. It takes the equivalent of $15-17,000 per year. After that level, "vehicle sales begin to slow."
In her presentation at the conference itself, Hughes-Cromwick noted that "we were the epicenter of the subprime disaster" but "we are in a global recovery." However, a 2008 consumer expenditures survey by the Department of Commerce found that 44 percent of consumer spending was done by households with $100,000 income and above.
Long-term industry volume growth drivers, in her view, include:
• Driving age population, which grows 10 percent per year in the U.S.
• Gross Domestic Product (GDP) per capita.
• Number of vehicles in operation, for replacement.
• Growth in vehicle ownership rates (density); the U.S. has shown recent decline.
• Number of vehicles per licensed driver (now close to one).
• Cost of ownership.
Globally, the number of drivers is expected to grow by 17 percent between 2008 and 2020.
"Residual values have been firm," Hughes-Cromick advised, but "we're scrapping more vehicles than we're selling." According to Polk figures, the number of vehicles on the road has declined for the first time since 1947: Last year added 2 million drivers; but "vehicles on the road fell." In addition, "we're in a world of likely higher fuel prices."
Hughes-Cromick considers the biggest economic problem to be "Medicare unfunded liability. Medicare is not funded today," she said.."We don't have a plan to pay for the benefits. [promised] in the program." She foresees potential for scarcity, but believes that "the laws of supply and demand will assert themselves."
In his keynote speech, Mack Vitner, managing director and senior economist for Wells Fargo Securities, led off by observing that the German election "went badly for [chancellor Angela] Merkle." As he put it, "Germany is the papa; maybe France is the Mama. The trouble is they've got a lot of troubled children."
In Vitner's estimation, the recession ended June 30, 2009 - though that may be surprising news for those who continue to suffer from its impact. There's been no official declaration that it's over, but the figures evidently demonstrate that "fact." In summer, "we expect the economy to slow," Vitner said, but "we don't see a double dip" (more recession) ahead. "We're still light-years away from what we went through in the Great Depression."
There has been a two-year shrinkage in inventories, Vitner said, but it's rising now. "Private final demand" has been slower to grow, however; and about "80 percent of that growth is tied to some sort of stimulus."
Vitner noted that there's been a "handoff from stimulus growth to private demand growth" taking place, adding that 40 to 50 percent of the stimulus money was spent in three quarters. The balance will be spent over 7 years.
After-tax income is up at a 3 percent annual rate. "Spending has come back much faster than income, or consumer confidence," Vitner said. He predicts stronger job growth, plus a bit of income growth. The Personal Saving Rate fell in recent months as consumer spending rose.
Consumer Confidence has improved but remains low, Vitner said. The labor market remains dismal - only marginally better than it was in the depth of the recession. Despite job growth in March and April, half of those positions were low-paying: retail, hospitality, etc. Some 65 percent of job growth since the start of this year has been part-time. Unemployment is likely to stay at 10 percent or a bit higher in the second half of 2010, Vitner predicted, because the economy is not adding jobs fast enough.
The labor market is Vitner's top concern, because the current situation has exceeded every post-WWII downturn: 1948-49, 1953-54, 1957-58, 1960-61, 1969-70, 1973-75, 1980, 1981-82, 1989-91, 2001, and 2007-to-date. In May, the average duration of unemployment hit 31 weeks - a new high. "You'll probably change jobs or industries," or both, after unemployment, Vitner said. So, your income will drop.
Re-entrants and new entrants into the labor force will likely account for a bigger share of the unemployment rate, in Vitner's estimation. According to the Department of Labor and Wells Fargo Securities data, of the 9.8 percent total unemployment in April, new entrants accounted for 0.8 percent; re-entrants, 2.4 percent; lob leavers, 0.6 percent; and job losers, 6.0 percent.
Many people were scheduled to complete 18-24 month community college program this June. "Because of the depth of this recession," Vitner said, "it was hard to decide what to be re-trained for" at a community college. In the South, many who lose jobs don't apply for unemployment, due to stigma, even though they've paid into it.
Vitner is especially concerned about Income Proxy: the percentage of income earned from work (average hourly earnings multiplied by hours worked). In this recession, the drop is twice what it's been in the past. Income earned from work has fallen 15 percent or more since the recession began.
Another concern is oversupply of housing, with too many vacant homes for rent or sale. Housing starts rose 20 percent early in 2010, but 2009 was the worst since the Sixties. Much of the increase, too, is from "speculators paying cash." By the end of the year, Vitner expects that housing prices will fall about 8 percent.
"We've seen an increase in risk aversion" in the stock market, Vitner said. "Banks are not inclined to take much risk today." He considers this "a payback for the TARP" (federal stimulus funds).
"I don't think there's that much pent-up demand for vehicles," Vitner suggested. Credit is "not as tight as many feared it would be," but still tight.
"Conditions do not have to be perfect for the economy to grow," Vitner concluded. But it will grow more slowly.
“We’re not even in the same city, much less the same ball park,” as the Great Depression, said William Strauss, senior economist at The Federal Reserve, noting that the economy had expanded by 3.2 percent in the first quarter of 2010. In his view, the "Great Recession" has been over for some time now.
Despite three consecutive quarters of growth, however, the situation “doesn’t feel that good,” Strauss admitted. Consumption is up, but one primary concern is that the economy must “absorb all those new workers into the labor market.” Instead, it's been falling short, so unemployment grows. Unless you’re creating 90,000 new jobs each month, he explained, you have a shortfall.
In addition to finding ways to “make every individual more productive,” it's necessary to “come up with this speed limit for growth,” Strauss explained. Although “financial markets are certainly well improved,” they remain “quite tight.”
By issuing loands only to the most qualified, “you lock out a large segment of the market” by givig loans only to the most qualified, Strauss said. “As markets improve,” the banks “will be willing to lend it out.”
During the two-year period ending in December 2009, nearly 8.4 million jobs (6 percent of the total) were lost. Unemployment peaked at 10.1 percent, in October 2009. An unemployment figure of 9.9 percent could be a good thing, in Strauss's estimation, because it signals that discouraged workers are looking again. At the same time, fear of insisting on increases “tends to keep wage pressures down.”
One big problem is that cutbacks continue at so many levels. The Purchasing Manager’s Index has risen sharply, Strauss said. “If you think the world is coming to an end, you cut, cut, cut, cut, cut.”
Turning to the auto industry in particular, Strauss noted that the share of domestic light vehicle production has improved over the past year. In fact, the share of “new domestics” has risen dramatically. In 1980, some 70 percent of light vehicles were made by the "Detroit 3." Volkswagen was the sole “new domestic." But not for long.
Over the years, the share of “new domestics” kept growing, to the point that 13 nampleastes now are built in the U,S. (14 next year, as Volkswagen opens its new Tennessee facility. “Manufacturers, for various reasons," Strauss said, "now are sourcing their production closer to the customer.”
In her role as director of automotive credit for Experian Automotive, Melinda Zabritski deals constantly with credit scores. Those were the primary topic of her presentation at the economic forum. Several companies compile three-digit credit scores for consumers in the general public, including Vantage and FICO. Zabritski focused her remarks on one of them: Scorex. She breaks the scores down into five categories: Super Prime, with a score of 740 and above; Prime (680-739); Nonprime (620-679); Subprime (560-619; and Deep Subprime (under 550), the most credit-challlenged group of them all.
As of the end of 2009, the number of Super Prime consumers had “held relatively stable” at 36.8 percent, Zabritski said. Prime folks totaled 23.9 percent; Nonprime, 15.2 percent; and Subprime, 8.8 percent. A troubling 15.3 percent of people fell into the Deep Subprime category, which means they would have trouble obtaining credit of any kind.
Highlights from additional presentations at the Automotive Economic Forecast and Financial Forum will be posted soon.
Note: This report is available now for your publication. Please contact us at JF@tirekick.com for details.