Why are U.S. auto sales suddenly slipping into reverse?
When news leaked out Tuesday that Ford Motor (F) would cut 10 percent of its salaried workers, it underscored how the auto industry's strong sales are slipping after years of consecutive growth since the Great Recession.
In April, the industry reported a 4.7 percent sales drop, according to industry tracker Autodata. General Motors (GM), Fiat Chrysler (FCAU) and Ford showed declines of around 6 percent or more in sales. Japanese car companies also were off in the North American market, although not as much.
As vehicle demand has ebbed, automakers find themselves dealing with bloated inventories. At the end of April, GM had enough vehicles to last 100 days, with 60 days the ideal level.
The lower sales affect both sedans and high-margin SUVs and trucks, which have been benefiting from lower gasoline costs. The most sluggish lines are small and midsize cars, which larger vehicles overshadow.
And due to government regulations, it's not as simple as simply shutting down most small car production capacity. Automakers "have to sell small cars to meet industrywide auto emission standards," said John Augustine, chief investment officer of Huntington Bank.
Declining sales have led to factory layoffs. GM will furlough 1,100 workers at its Lansing, Michigan, plant for at least five months. Fiat Chrysler has laid off 3,200 workers at its facilities in Toledo, Ohio, as it retools its operations.
This development, if it continues, could put the industry at odds with President Donald Trump, who is pushing to bring industrial jobs back to the U.S.
The auto sector's ebbing fortunes contrast with the rises in consumer optimism, boosted by steady job growth and low unemployment. During the first quarter, however, gross domestic product turned in its weakest growth in three years at a 0.7 percent annual pace, as consumer spending barely rose and companies spent less on inventories.
Of course, car makers' suddenly bumpy road may be temporary. Low fuel prices, a strong employment picture generally and the arrival of summer, traditionally a good season for car sales, may turn things around.
Still, Detroit is hardly in a festive mood nowadays. "We are very cognizant that we operate in a cyclical industry and we are in the eighth year of expansion," said Chuck Stevens, GM's chief financial officer, at the company earnings call for analysts recently. "We are very focused on acting like we're in a downturn."
Here are the roots of the slump:
Demand has peaked. Last year, there was a record vehicle sales volume of 17.55 million. But the National Automobile Dealers Association forecasts that will slide to 17.1 million in 2017, which still is on the high side historically. And that will come despite a barrage of discounts -- about about $3,900 per vehicle, or around 10 percent of the suggested retail price, according to research firm J.D. Power. That's the biggest discount level since the recession.
Why the demand falloff? It may simply be that, for now, everyone who wanted a car bought one. Low inflation and interest rates, along with cheap gas, may have pushed more buyers into the market than would typically want new wheels.
During the recession and its aftermath, many owners held onto their vehicles. So then they traded in the old ones, creating a glut, which further plumped up the over-supply. Morgan Stanley analysts predict that used car prices will fall by up to 50 percent by 2021.
Credit reversal. Low interest rates led to more available credit for auto buyers. One aspect was an explosion in long-term loans, to six years or so. That's a long time to be committed to a vehicle, and consumers end up paying more over time in interest.
Further, reminiscent of the housing boom and bust, lenders loosened standards, and auto loan generation ballooned 56 percent since 2009, with a third of it subprime, noted Lincoln Capital Research.
As a result, car loan delinquencies (90 days or more past due) have climbed to their highest levels since 2008. The upshot is that many lenders are reexamining their lending policies, which could bring a credit contraction. Hence, the easy-money spigot likely won't be open wide for autos for too much longer.
Problems overseas. Although most U.S. multinationals did better offshore in 2017's first quarter, Detroit automakers made very little money outside of North America. General Motors was the best of a bad lot. Beyond North America, GM had difficulty breaking even, with decent performance in China offset by South American and European losses. It has put its European brands, Vauxhall and Opel, up for sale.
Ford garnered all its net income in North America. Italian-controlled Fiat Chrysler, despite its London base, made 80 percent of its earnings in North America.
In a research note, Bank of America Merrill Lynch analysts Michelle Meyer and Alexander Lin warn about "weakness ahead for the auto sector, but there is the lingering question of how quickly the story will evolve." Thus far, they add, the industry's shaky state is "manageable" for the economy as a whole.
That's cold comfort for Detroit.
