Wolf Richter: The Next Tire To Drop On The US Economy

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Testosterone Pit.

Auto sales in the US have been hopping for the last few years, and production has soared, and exuberance along with it, and there were even hopes that sales would soon be where they’d been before the crisis, before the bankruptcies, the plant closures, the job destruction, the bailouts. Through August, it looked like it could happen. August sales hit a seasonally adjusted annual rate (SAAR) of 16.09 million new vehicles (Motor Intelligence), which is close to where sales had been before the crisis.

The auto industry plays an outsized role in the US economy, in manufacturing, services, and retail (accounting for nearly 20% of total retail sales). Booming production and sales have been pushing economic growth when hardly anything else was.

Then came September and October and the government shutdown and the taper or whatever, and the SAAR dropped to just over 15 million vehicles in both months, and unsold inventories piled up. But it wasn’t time to get nervous. It would be just a blip. Sure enough, in November, sales jumped to a rate of 16.4 million units, and everyone breathed a sigh of relief: there’d be no slowdown; the party would go on.

Then the December debacle happened. Inventories were already high when sales dropped to a SAAR of 15.4 million vehicles. It brought actual sales for the year down to 15.6 million units. This time they blamed the snowstorms and the polar vortex and whatever, and true, no one in his or her right mind goes out to buy a car during a snow storm, but snowstorms happen every winter, and the weather was beautiful in other parts of the country, including much of the West Coast.

But never mind. The Detroit Auto Show is happening, and exuberance is boiling over. GM promised to pay a dividend. Tesla goosed its stock price with another one of its announcements. Ford stirred up excitement with visions of an aluminum-framed F-150. And gleaming models were on display, and industry insiders were cranking out hype at 80 mph.

Then AutoNation CEO Mike Jackson poured cold water on it all. He should know. He runs the largest chain of dealerships in the country, an empire of 225 stores that sold 296,419 new retail units in 2013, about 2.24% of total US retail sales. He warned about the out-of-whack inventories.

Dealers were sitting on $100 billion in new vehicles – which automakers had already recognized as sales on their books. Channel stuffing. There were 3.45 million units waiting to be sold. While sixty days’ supply would be “an accepted inventory figure,” as he said, current levels are far above it. The figures were even worse with fleet sales taken out of the equation. He put his finger where it hurts, where it has always hurt.

Fleet sales can be a profit sinkhole. They’re in the infamous category of “but we’ll make it up with volume.” Ford was Number One in that dubious category, with 707,000 fleet units, or 28% of its total sales. GM sold 653,100 fleet units, or 23% of its total sales. Chrysler 22%, Toyota 9%, Hyundai-Kia 15%, Nissan 14%, and Honda 2% – it only sold 30,400 fleet units. Combined, these top seven sold 2.35 million fleet units in 2013, or 15% of total sales.

With fleet sales, Ford made it to Number Two in the US. Based on retail sales only, Toyota was Number Two, beating Ford by 262,000 units! That’s one of the reasons why Ford and GM and others are doing it: bragging rights.

Fleet units largely bypass dealer inventories. Once fleet sales are taken out of the equation so that only retail sales count, inventories suddenly look enormously bloated, with 90 to 120 days’ supply, Jackson pointed out.

And now sales have started to slow down. The bane of the industry. In addition, January and February are usually the slowest months of the year, and they’re starting out with bloated inventories. Unless a miracle happens, they’ll end up with even more bloated inventories.

Automakers and dealers are already reacting, Jackson said. Discounts are rising, and automakers have started paying dealers for hitting monthly sales targets. But that won’t be enough. Rebates and other incentives will be next. The chances of an all-out discount war, the kind that tore up automakers before the crisis, are fifty-fifty, he said.

“What I’m saying is you’re on the edge of a slippery slope and even sliding down it a bit,” he said. “It’s a risk.”

Unperturbed, automakers are producing cars like hotcakes. Exuberance leaves no room for a slowdown. And over the next few years, they’re even boosting annual production capacity in North America by over one million vehicles!

GM, Ford, Toyota, and Honda are expanding existing plants in the US and Canada. Nissan just put a new plant on line in Mexico. Volkswagen, Honda, and Mazda are building new plants in Mexico. Volkswagen said that it would build another new plant in North America. And its plant in Tennessee is operating at half of its capacity. But who the heck is going to buy all these cars?

“The last thing we need is to get bricks-and-mortar capacity increased,” warned Chrysler and Fiat CEO Sergio Marchionne.

The devastating crisis in the industry was caused by years of overcapacity, overproduction, steep rebates, hollowed-out balance sheets, bloated inventories, and a host of other problems that suddenly came in contact with crashing sales. This experience taught the industry to not ever lose sight of that vaunted “discipline.” The industry would never again be blinded by exuberance. But that lesson has already been forgotten.

Slowing sales and ballooning inventories are a toxic mix in the auto industry. With production and import schedules set way in advance, there is no way to suddenly turn off the spigot. Instead, automakers and dealers will have to figure out how to get rid of those vehicles piling up on their lots and coming down the pike. Large incentives would help, but they’d bleed profits from automakers – something they’d promised to not ever do again. And once the industry has become addicted to the incentives, it’s nearly impossible, as the industry consistently re-found out, to stop them.

Given the size of the car business in the US economy, even a minor squiggle will be noticed. In the best-case scenario, sales would accelerate sharply without too much discounting, and it would eat up excess inventories. If that doesn’t happen, there’d have to be big discounts and rebates and other incentives. They’d bleed the automakers, and eventually they’d have to cut production, and overtime would be eliminated and then entire shifts, and people would be furloughed, and so the industry that consistently outperformed over the last few years and pushed manufacturing and consumer spending forward and caused economic growth to tick up would suddenly be a big drag on the economy.  

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  1. bill

    And that is not to mention the impact of cheap credit and total abandonment of any credit standards for car loans. Look at LTVs on new car loans, and the LTVs on used car loans are insane, and the length of the average car loan continues to stretch longer and longer – during which the borrower is almost always under water. Basically lenders are betting that people will not default on the car loan for the car they need to get to work … we will see.

    1. Sammy Maudlin

      You’re very correct in that automakers are making cars more “affordable” by lowering credit thresholds. It seems that GM in particular may have (not?) learned a thing or two from its days as a mosrtage originator:


      One impact of these race to the bottom sales techniques that I haven’t seen studied is: what is the collective effect on the credit rating of these customers? Of course, many of these people Are charged higher interest rates and tend to default more often.


      Sooo, then their credit rating is worse now… and how can they no qualify for a loan to buy another car? In other words, where is the desire for the repeat customer? Sure, lenders and investors in the securitatization pools are generally more protected on the collateral side with subprime auto loans, because the collateral is easier to get back than a house and maintains its value better than a TV.

      But more to your point and the point of this article, how are they going to sell all those cars if they keep defaulting people out of the market? Keep lowering the LTV ratios? Is that sustainable?

  2. Schofield

    Hey I’ve got some great ideas for boosting car sales why not screw down wages and let volume manufacturing go to other countries that manipulate their currencies and/or taxes or don’t have the same level of over-heads or demand as developed economies and finally let the Banksters plunge most people into ever increasing debt. All these ideas will surely bring down the price of cars to make them more affordable again. Won’t they?

  3. Dino Reno

    Right now it’s zero down, zero interest rates for 7 years, zero payments for six months and a wink-wink credit check. Trade in values are high book for any piece of garbage you can pull, push or drag. Walk on the lot of any dealership and they will literally hand you the keys and beg you to drive a new car away on any terms you deem appropriate for your circumstances. Junk car loans are being bundled and sold by the likes of Blackrock. Any of this sound familiar?
    The only cash being exchanged at point of sale is for sales taxes. That’s right, there goes the government again messing with a good thing.

    1. Moneta

      Here in Canada, loans/leases used to be for 3-5 years, now it’s 5-7.

      Kick the can down the road, extend and pretend…

    2. Sammy Maudlin

      “Right now it’s zero down, zero interest rates for 7 years, zero payments for six months and a wink-wink credit check.”

      Nailed it. I have some intimate knowledge of the workings of a Nissan dealer. I can tell you for certain that the true spread of FICO scores for its lease and loan customers looks nothing like the spread that Nissan USA is advertising to prospective securitization investors (see p. S-34)


      Of course, that would only be true if they really bothered to check them.

      1. OpenThePodBayDoorsHAL

        I remember when we had a functioning regulatory and legal system in this country that made American capitalism the envy of the world. Financial fraud like you describe would be ferreted out and the perps would be prosecuted to the full extent of the laws on the books. How quaint now to think of those days and ponder just how very, very far we are from them today.

  4. Embrace the Suck

    In the US auto industry cycles are very robust and tend lead the rest of the economy by 2 to 2.5 years. In the case of the Great Recession, the auto industry’s crash was exacerbated by the financial crisis, just as it was for everyone else. If the recession had stayed “normal” or “frictional”, we would have seen auto recovery in late ’08 or early ’09.

    Along with the production and sales cycles there is a discernible credit cycle. At the beginning of auto recoveries sales are driven by cash buyers and prime credit risks. Folks who survive the beginnings of a recession with good savings or good credit can get an amazing deal on a new car. As the recovery goes on more and more folks with money buy, trade-in, and trade-up. But demand for the relatively well-off group is not bottomless, and sales eventually plateau. We’re seeing that now.

    Here’s the thing–in order for sales to stay at the elevated level, less prime, less wealthy prospects have to become paying customers. And that means sub-prime auto lending has to grow. I think this is a good thing on the whole. It allows a person with a job to improve his personal real capital position (provided s/he doesn’t get stuck with a lemon), and improve his or her credit rating. it also keeps millions of people working.

    In the wake of the Great Recession lots and lots of supply chains were wiped out. Many because the companies went out of business or funding dried up. Many more were wiped out in gratuitous quarterly profit taking. We saw the effects of busted supply chains in residential real estate through 2013. Sub-prime auto lending can be characterized as a still-broken industry. I’m certain that auto sales can remain strong because there’s profit yet to be made by dealers, lenders, and investors. But since many firms went out of business and those remaining are still reluctant to hire and train, it will be at least 6 to 9 months before the credit pipeline gets to a position where it can meet immediate demand, let alone address the buildup. By that time loan investors will be hungry for the return.

    Here are the takeaways if you agree with my perspective:
    * Auto sales have plateaued but may temporarily drop by another 1.5 million annual units
    * The sales slump won’t go on for more than a year
    * Subprime auto lenders with working pipelines will have an excellent profit opportunity
    * It’ll be at least a year before excess inventories are worked off
    * New car buyers in 2014 will get a much better deal than those who follow in 2015

    Just my opinion.

    1. Moneta

      I think the total budget will be going down over time. So looking at the size of the fleet will not show the full story. The number of cars might hold up, but buyers will be forced to buy cheaper models. As the boomers retire, I expect the number of cars on the road to dwindle unless we start to see a wealth transfer from the old to the young.

  5. Jim Haygood

    ‘Ford stirred up excitement with visions of an aluminum-framed F-150.’

    Yeah, I got pretty excited upon reading that aluminum components might cut the weight of Ford’s best-selling pickup by 450 lbs. The thrill diminished upon confirming that most existing F150s tip the scales at over 5,000 lbs.


    Even after going on an all-aluminum diet, these behemoths will still be the equivalent of a late-60s Chrysler or Buick land yacht, with its billowing yards of Detroit-iron sheet metal.

    Those who want lightweight vehicles — the reigning obsession of Henry Ford during the Model T era — have to go back to the Nineties or earlier for vintage models. Thanks to fedgov safety standards, we don’t do ‘svelte’ no more.

      1. craazyman

        Not bad at all. I had an idea a few years ago — for people who can’t afford boat cruises or who get bored looking out over the same old horizon each day: Go on a Land Cruise.

        You could hitch a long trailer — like they carry horses in — up to a truck. Take out the stalls and put in a bar, a grill and music, with a few rooms for beds..

        People pile in and party, cruising from town to town. Milwaukee to Indianapolis to St. Louis, up to Chicago and back to Milwaukee. All on the interstate or the backroads. That would be up to the tour director. One or two weeks.

        You cruise by day, eating and drinking on the highway, listening to music. Then you park and visit the city,

        Maybe $400 per person. You could see America in a way it’s never been seen before!

        There’s no reason why the sea has to be special. The land can be cruised, and at a surprisingly affordable price.

    1. Sammy Maudlin

      Ahhh, Haygood. Thought you’d get everyone with the old “apples to oranges” comparison didya? Not so fast!

      Obviously comparing a 2014 truck to a 60s land yacht is ridiculous. However, if you look at apples to apples, even in its most basic form, today’s F-150 has twice the payload hauling capability and gets approximately twice as many miles out of a gallon of gas than a late-60s version.


      Weight’s just killed it, I know. You don’t suppose that any of the new weight has gone to sound deadening and creature comforts, do ya? I mean those old ones were pretty luxurious.


      Oh and how about those land yachts? Well, credit where it’s due, Haygood (not alot, don’t get your hopes up) A base 2014 Buick LaCrosse weighs in at 3757 pounds. A full 300 pounds more than a base 1992 (“vintage” in Haygood parlance) LeSabre.


      However, the 0-60/mpg of the 2014 is 8.9 and 27/36. The 1992? 8.8 and 16/26.

      You’re right, I suppose. I do need that tenth of a second off the 0-60 time on my mid-size Buick for my street racing cred.

      Damn gubmint!

  6. j gibbs

    I bought a one year old car in 1997, for $23k. It still runs just fine although the automatic door opener no longer functions. I now pay about $700 a year to keep it running, mostly for a mandatory emissions inspection.

    Anyone have an idea what this is worth on a trade-in?

    1. optimader

      gibbs, It’s value is in the avoided cost of replacement, not residual value. Maintain it like an airplane and it theoretically will last for ever if it was a decent car to start with.
      This is the broken window fallacy essence of the cash for clunkers program. Perfectly functional cars were prematurely replaced with new.

      1. j gibbs

        ‘avoided cost of replacement’; I like it. Clearly, you are not an economist, since the concept makes too much sense.

  7. owenfinn

    Hard to empathize – bad news for the auto industry is great news for the planet. The auto industry owes a great deal of it`s success to the fact that, it has been, for three quarters of a century, the beneficiary of deliberate car-centric urban planning and transportation policy decisions that fed the industry by making most American`s car dependent.

    Perhaps the tide has turned? It`s encouraging to see that many cities, it seems, in the interest of safety, sustainability and improved quality of life, are now actively discouraging personal car use with more protected bike lanes, pedestrian plazas, and lower speed limits. Hopefully, in the interest of sustainability and the environment, the trend continues and spreads – long term it should be good for the economy anyway (just in a very different way).


    1. susan the other

      I agree and I also think there is a consensus trending in this direction. Two years ago Wolf Richter pointed out what he saw as a real estate bubble in Germany, which I said No Way because in Germany there is no new place to build. But recently I read an article about the boom in commercial, government financed building in Germany. Maybe Wolf saw this coming. This might mean, as it did here, that there is nowhere else to turn to keep the economy afloat except construction… but it doesn’t last. And even if Mercedes and VW have moved their factories to the US and Mexico, sales are hopeless in this saturated, jaded world. I certainly will not ever buy another car. And I expect the coming generations to demand decent public transportation – no more free rides for greedy corporations.

  8. William Neil

    New cars can be very nice: the smell, the drive, nothing too loose. Most of the time they do not breakdown, at least during the first 25,000 miles, and one doesn’t have to live with one’s heart on edge of facing major bills. I remember what that is like, my last new car being in the fall of 1999. So that last new car is now fourteen years old. I am so far removed from being able to afford a new car that I can just laugh at the absurdity of the notion.

    If the nation would set the minimum wage at $15.00 per hour, I could stop worrying so much about it breaking down, but I still wouldn’t be able to afford a new one, far from it, and, working in retail, my hours have just dramatically dropped from the Christmas season.

    So I can read this like a child dreaming of what they are not going to get at Christmas. And the notion, so popular on the Right, and by today’s Krugman’s column, among the deluded left-center, that supply will create its own demand, well, you know where you can file that notion.

  9. Andrea

    In Europe, for the ‘somewhat rich or middle upper to lower’ young (to 35 without a family) who are urban dwellers, or semi or even peri-urban with public transport available, the cost or a car are astronomical and absolutely not worth it.

    Buying / leasing, road tax, car-tax, and other variants of taxes, sky-high insurance, parking -which may even be impossible, putting paid to any dream of a small Fiat – you can’t jack it up to your flat – repairs and maintenance, fines, cut desperately deep into any budget.

    That is even before the costs of actually going anywhere in it are figured in – gas, oil, tires, parking, which may be extremely steep.

    HIre cars, ‘mobility cars’ and ‘share cars’ are far cheaper for the few trips one might want to take. For this expenditure, the usually richer parents help their poorer children out, lending them cars for a trip or so, they can hardly refuse.

    It is cheaper, in Switzerland, to fly to Madrid or Stockholm than to leave your car for 3 days in a parking spot…

    The poorer young ppl can’t afford a car at all so that is that.

    Of course Europe is not the US, the infrastructure, necessary travel, and social mores are different.

  10. asd

    Also, young people aren’t buying cars. They don’t really give a crap about car culture, and they’re poor as hell, so not dealing with car expenses is a huge boon to their financial health.

    1. spooz

      Its unfortunate, however, that many jobs require reliable transportation that young people can’t afford. Kind of a Catch-22.

  11. sharonsj

    Sorry, but even with zero down and zero interest, I still can’t afford a new car. And isn’t half the country now considered “poor” while the middle is getting poorer? Whenever the experts are surprised by slumping sales, I just laugh and wait for the bottom to fall out again.

  12. Vedicculture

    Auto sales of 15.5 are booming. People got used to the Truck boom that the housing bubble caused. That isn’t coming back. The economy grew to much between 2004-6 and that is another point people miss.

    Another poor post on this site. What else is new.

  13. Jeff N

    I actually can’t wait to buy a GMC Canyon/Chevy Colorado *diesel* compact pickup, coming out in late 2015. the fuel economy will be awesome! :)

  14. George Phillies

    New cars are good for something like fifteen years or a quarter of a million miles, more in areas were roads are not buried in salt for three months. There are about 240 million vehicles in the country. A simple process of long division says 16 million sales a year is about it, and some of those 16 million are imported. Now, if we had 1950s clangers that were barely good for 4 years or 50,000 miles, we would need to build 60 million vehicles a year, but we don’t, so we won’t.

  15. Paul Tioxon

    When my 10 year old Nissan cracked the engine block, I replaced it with a 12 year old Honda. It was a sweet deal. All white, power sun roof, low mileage, owned by a Main Line Auto repair shop mechanic. That’s right my new car is 2 years older than my old car.

  16. Fiver

    Interesting comments. My sympathies to those without wheels who need them, and quite understand that circumstance. Also being forced to have a car by a job can be brutal.

    From an environmental perspective, the automobile is Waste personified. Why do we all have to have a car, if we could set it up so a fraction would do the job and everyone gets where they’re headed safe, sound and in comfort?

    I’ve seen reports of “channel stuffing” elsewhere off and on over time, so I’m not sure how new this is, or if there can be temporary factors that would make for the same result. It really has been a brutal winter, and other sales were also unimpressive. In any case, the process on its own would appear to have considerably more room if looked at from the “last time” perch. I wonder if that’s the right perch, though, for the next crisis – I can’t imagine Yellen is as tough on “taper” as she is on paper.

    Just a question: is it certain companies building new facilities aren’t also intending closing somewhere else? Jurisdictions are forking over piles of money and other “inducements” to land new plants or expansions.

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