Forecast: US Auto Market May See Great Depression Like Collapse

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Comments: 3

March 10, 2009

Back in October as the economic conditions were beginning to unravel because of the collapse in the banking sector, an estimate was presented projecting vehicle sales in the US for 2009 could range between 12.8 and 14.8 million units (See Black September - US Auto Sale Collapse and The Pending Great Reckoning). At the time, it was assumed vehicles sales would decline in a similarly manner to other post-war recessions, specifically the early 1980s recession and fall in a range of 12% - 24%. In September, the seasonally adjusted sales rate (SAAR) was 12.1 million vehicles as consumer confidence dipped and the credit markets froze, preventing consumer from financing vehicles. Since those earlier estimates, automobile sales continued to decline and as of February 2009 the SAAR was 9.1 million vehicles (Figure 1). That is a 41% decline from the 15.4 million sales rate a year ago.

Figure 1: Seasonally Adjusted Annual Rate of US Vehicle Sales (Source Automotive News)

Last week the relationship between fullsize pickup truck sales and new housing starts was discussed. It was shown that pickup truck sales rise and fall with new home construction (See "A Going Concern" – The Global Auto Industry). In today’s market new home construction continues to decline and pickup truck sales are following, with little indication either will hit bottom soon.

With automobile sales now at their worst since World War II and exceed the declines the industry saw during the 1980’s recession, an analysis was conducted to investigate how automobile sales would fair in the worst of all possible economic environments – The Great Depression.

Production data was compiled for the industry during that era (US Automobile Production Figures). It should be noted that the data is not complete and only represents the major automobile manufacturers. However for a high-level study it is sufficient.

Between 1923 and 1928 the production was steady and relatively consistent. Figure 2 illustrates that prior to the stock market collapse in 1929, the industry was producing approximately 3 million vehicles a year on average. The year 1929 was a high water mark for the industry as production increased to over 4 million vehicles. Production would not reach 1929 levels until well after World War II. After the October 1929 stock market collapse set the banking industry into a tailspin, production plummeted for three year prior to improving in 1933 in response to the government injecting stimulus spending into the economy.


Figure 2: US Auto Production 1918 – 1941

By 1932, automobile production fell 77% compared to the 1929 high of just over 4 million vehicles. Production in 1932 was under 1 million vehicles. The market did improve later in the decade and by 1937, production was 16% lower than 1929. However the economy weaken in 1938 and production fell 50% compared to 1937 to 1.7 million vehicles (Figure 3).

Figure 3: US Automobile Production 1929 Baseline

Vehicle production increased 27% in 1929 over the previous year. Factoring out the spike in 1929, by 1932 production was down 70% when compared to 1928. Without the sharp increase in production in 1929, the years leading up to the crash were similar to the US market from 1999 through 2007 in that the market was relatively steady (Figure 4).


Figure 4: US Automobile Production 1928 Baseline


Based upon the percentage decrease using 1928 production as the baseline, sales projections for 2009 through 2015 were developed to forecast what could happen to US sales if the current economic crisis reaches the Great Depression level right after the 1929 crash. The sharp increase in 1929 production was deemed to be an anomaly of the times and for this analysis it was assumed 1928 best represented the steady state market condition of the preceding years. It was believed that to base projections off 1929 would have made the estimates obviously dramatic.

The most recent peak in US sales was at 17.4 million vehicles in 2000 and it also corresponded to a similar stock market bubble. For similar reasons, 2007 was used as the baseline sales year for the purposed of modeling sales for 2009 through 2015. Sales in 2008 declined 18% from the previous year and it was consistent with the 22% drop in production when comparing 1928 and 1930.

Sales were used instead of production because of the degree of globalization of the US market in the last 30 years. For many of the foreign owned transplants it is difficult to determine what vehicles are produced for domestic consumption and export. Also the US imports a large portion of the vehicles and it would be difficult to identify what production cuts at overseas plants are attributed to the US market’s weak demand. In recent years, vehicles imported for sales represent about a 25% of the market. Production decreases generally lags demand as unsold vehicle build up in inventory prior to production being cut. Therefore without having sales data during the 1930s there may be some minor error in the timing of the projections and variability in the rate of production increases/decreases to vehicle sales. However, the overall relationship between sales and production should be similar enough for the purposes of this study.

Manufacturers building vehicles in the US have been cutting production because of the weak market. The production forecasts (Chart 1) help illustrate the sharp cut backs in vehicle manufacturing for the first 6 months of 2009. The major manufacturers are planning to reduce production by 36% in the first half of the year. The production cuts are consistent with the sales declines.





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Chart 1: 6-Month Forecast of US Production in Thoudands (Source Automotive News)

 To balance the projections based upon the market correction during the Great Depression, market estimates used in GM and Chrysler’s recent viability plans to the US Treasury are also presented. Chrysler’s baseline and GM’s downside sales volume for the US market specifically are present to offer a range of where the market may be heading. The projections are presented in Figure 5.

Figure 5: US Sales Projections 2009 - 2015


The forecast exercise presented in Figure 5, appears to be a reasonable worst-case analysis of where the US market may be heading if the severe economic conditions are not mitigated and continue. At this time all indications are the automobile market will continue to weaken over the next few months and possibly into the 4th Quarter. Housing starts also continue to decline reducing the market for pickup trucks which has been shown to track new construction.

Will the market fall to a Great Depression era low of fewer than 5 million vehicle sales a year? It certainly could. Back in September I never would have thought the market would have fallen to the current 9 million unit sales rate. With both GM and Chrysler on the cusp of collapse, if the US government were to decide not to continue to provide bailout funds to either, sales could fall to the Great Depression adjusted level. However, I believe the US economy is much more elastic than it was during that time. As bad as the credit markets are at this time, credit is still available if at more demanding terms by the lender.

In Chrysler’s viability plan, the company stated the industry is no longer viable at 9.1 million vehicles sales. One thing is certain, based upon current market conditions, GM and Chrysler’s viability plans are questionable at best since February’s SAAR was at 9.1. Granted the market would need to stay at that level to about September but at this time, that appears more and more likely. Also to consider is the possibility of smaller manufacturers such as Suzuki or Mitsubishi could exit the US market further eroding the SAAR. Sales being generated today are also highly subsidized by the manufacturers and not sustainable. Last month Chrysler offered on average over $5,000 per vehicle including almost $8,000 on the Jeep Grand Cherokee. If not for the deals, sales would be expected to be much lower.

Unlike the sales recovery in 1936 to pre-1929 levels, I do not believe the US market will improve to the pre-financial crisis baseline of 16 million sales by the middle of the next decade for a number of reasons. First, production capacity is likely to be permanently cut, not only in the US but globally. Manufacturers may not have the ability to produce the quantity of vehicles to sustain a 16 million market. Second, the earlier market highs were artificially driven by cheap and easy credit including incentivized leases. Those conditions are unlikely to return anytime soon. Lastly, vehicle prices will likely go up on average because of added technology costs related to fuel economy improvements. This could further suppress demand. Based upon available information, a reasonable expectation for sales in the middle of the next decade is 14 to 15 million vehicles per year. This would also be consistent with GM and Chrysler’s expectations presented in their viability plans. Another issue to be considered is, assuming the economic stimulus package spurs sales in the near term, if the economy does not gain organic traction, the economy could contract again. To illustrate what happened during the Great Depression, in 1938, auto sales dropped 50% after recovering to the pre-1929 levels as the economy went back into recession.

To make matters worse, the automobile supply chain is at the tipping point and heading toward failure. Last month the supplier trade association requested $18 billion from the US Treasury. In March, it was reported revenue was down over 70% when compared to last year with two-thirds of the suppliers in a negative cash-flow situation. The situation is dire considering manufacturers in the US including foreign owned transplants share the same supply base. If one major supplier goes under, the repercussion could be felt by all and the manufacturers do not have the cash to temporarily prop up faltering suppliers. Today, Ford’s former captured parts unit Visteon is about to default on a $16 million bond payment. If Visteon were to file for bankruptcy and if contingency plans were not put in place to keep operations running, Ford could be shut down and who knows what other manufacturers could be adversely affected. As of today, no decision has been made to the suppliers request for financial aid from the government.

Make no mistake, a worst case collapse in automotive sales has been presented based upon how the market performed during the Great Depression. However, given where the market is today and the potential collapse of at least two US manufacturers and the supply chain, it is not entirely inconceivable.


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Tue Mar 10, 2009 10:01 am
Name: haypops | Comment: Seldom do I see (not that I am well read) mention of the effects of post-war recessions on the economy. I think you are correct to include this. The emphasis of others on a housing bubble implies a quicker recovery than should be expected.

Tue Mar 10, 2009 10:33 amBTW - Visteon paid the $16 million interest payment on its debt earlier today.

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