Can The Auto Sector Hold Up The US Economy?

Guest Analysis From August Cole, CBS.MarketWatch.com Aug. 17, 2002

CHICAGO (CBS.MW) -- The list of things to worry about just gets longer.

The auto industry's 2003 models are almost here but lo and behold, there are signs that consumers are finally cracking.

"Consumers' attitudes toward buying conditions for vehicles and large household durables declined slightly," said Richard Curtin, director of consumer research at the University of Michigan.

"Vehicle buying attitudes fell slightly despite zero interest rate incentives as fewer consumers mentioned the availability of steeply discounted prices to go along with the zero interest rates," Curtin said, reporting on the latest consumer survey. See full story.

What drives that shift in attitude?

The stock market is one downer.

Take a look at any chart and you can see what the half of the country that owns stocks has been going through.

But unemployment seems to be one of the biggest concerns. With the jobless rate now closing in on 6 percent, we'll see how much restraint buyers can exercise.

Worries about the economy have their roots in corporate accountability, which has jarred the way we look at markets, business and each other. Just think of a time when the actions of so few cost so many so much.

So even if you have to have one of the new Chevy Avalanches without the plastic Tonka treatment, you're gonna hold off if you're worried about making the payments because you're not sure if your company is going to be a going concern in 12 months.

Unemployment is also a big-picture problem that compounds company-level concerns about underfunded pension plans, tiny profit margins and competitive products. A decreasing sales climate, whether for economic or competitive reasons, means there's much less room for companies to make mistakes.

New era, old problems

A healthy and hearty consumer isn't a new worry.

Since last summer, unemployment has been a hot-button topic in the industry: How will a growing number of layoffs impact demand for cars?

When you look at how the industry can overcome that hurdle, they've succeeded for now. So far, cutting the cost of vehicle ownership with cheap financing and rebates has gotten buyers to show up in near-record numbers. As has been the case for most of the year, last month's sales were hot in large part because of these very programs.

But the debate continues about just how long this can go on. July's incentives came in at the highest levels since zero-percent financing debuted last October, not long after Sept. 11. The industry incentives averaged at $2,251, according to Merrill Lynch.

"The big question mark for the industry going forward is the rate of increases of incentives," said Ron Tadross, analyst at Bank of America. General Motors (GM: news, chart, profile), firing the first savings salvo, can't keep raising incentives, he said.

If GM backs off, it may take some pressure off of Ford (F: news, chart, profile), or get Chrysler (DCX: news, chart, profile) to back down from its generous powertrain warranty programs. But it would hurt industry sales overall.

The future of incentives will depend in part on how the 2003 models are received. Late Friday, Ford said it would continue to dangle zero-percent financing out there on 2002 models through Sept. 30 as well as offer low rates and rebates on 2003 models.

Is that a sign of concern? You bet.

Remember, too, that it's not just the automakers that are sweating this. So is the Fed.

Less makes more

Though the Federal Open Market Committee didn't cut rates last week, there's little indication they're going to raise them anytime soon. In fact, another 25 basis points, or even 50 basis points, could be in the cards if the rate-setting group's latest report is to be believed.

Would a rate cut really make a difference at the dealership? Probably not.

The psychological impact of a rate cut depends on if you think it's a yellow flag for the economy or you think it's like that 100-plus octane gas they sell near racetracks -- a risky way to juice your power. Remember, overnight lending rates sit at 1.75 percent -- a level not seen since the early 1960s.

And for that reason, there's no sure thing that sales will keep ticking along at the rate they've kept up so far this year.

The next check-up comes with the August sales data. Yes, it's that kind of a time when each monthly update tells a bigger story beyond a 12-chapter tale.

Behind those numbers is the realization that the Fed's actions can't guarantee work or that executives play fair. Nobody can.

August Cole is spot news editor at CBS.MarketWatch.com in Chicago