July 2009 US Auto Sales – Can Cash for Clunkers Create Momentum?

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Comments: 1

Tag: GM, Cash for Clunkers, CARS, NHTSA, July Sales, auto industry, DOT, LaHood, inventory, pickup, 2009.

August 19, 2009

It has been a couple months since The Automotive Lyceum published it last article, right as General Motors (GM) was entering Chapter 11 bankruptcy protection.  In that time there really has not been much to report on until the US governments Cash for Clunkers was implemented in July to jump start car sales.  The intent of this latest article is to focus on the market conditions in the US and try to gauge where the situation is heading.  This article will examine the US government's incentive program discuss and if it will have any lasting impact with consumers that will encourage a market rebound.  To start things off, this article will briefly touch upon the major industry developments over the last couple months.

Industry Highlights:

GM and Chrysler have both taken their quick rinse court and have successfully emerged from bankruptcy protection.  At least in the case of GM, the company appears to be accelerating their future product plans and based upon what I have personally heard about a recent preview, the product appears to well done.  GM also may have reached a deal with Koenigsegg to sell all or a majority stake in its SAAB that has been up for sale as part of its restructuring effort.  The company has also reached an agreement with Penske Automotive Group to sell the Saturn retail arm.  Why Penske would want Saturn continues to baffle me given the saturation of brands in the US.  However, when the deal is concluded, the company can focus on its remaining brands in the US. Finally, GM has yet to finalize any deal to sell a majority stake in its European Opel division to auto parts supplier Magna International or the investor group, RHJ International.  One would think that Magna would have learned after their failed attempt to buy Chrysler and where Chrysler ended up.  The German government prefers a deal with Magna, however, I believe Opel would be in better hands with RHJ.  An Opel-Magna deal poses more risk and potential conflict of interest with GM as they will retain a minority stake in Opel.  I also have to assume RHJ does not want to remain in the auto business and will sell their stake back to GM once GM can afford to do it.

This leads me to Chrysler. At this time the situation is eerily quiet since the Fiat takeover.  I have not heard of any major product going through or what Fiat plans to do with what is left of the company.  My outlook on Chrysler Group is still dim.  As for Ford, they appear to be going forward and continuing to execute their business plan (Financial Results).  In the second quarter, the company reported a paper profit of $1.2 billion and more importantly cut their cash drain for the quarter to $1 billion.  The company also had $21 billion in cash on hand and the stock also recently hit a 52-week high of $8.86 per share.  This is impressive considering the company now has over three billion shares outstanding.  Also, Ford could continue to dilute to further raise cash and exchange debt for equity in the company. For the time being, the situation at Ford appears to have stabilized.

On the international front, Volkswagen (VW) and Porsche will finally be merging their operations (See The German Auto Industry: Daimler, Porsche and Opel Struggle) to save the Porsche hedge fund from bankruptcy after an unsuccessful highly leveraged attempt to buy VW almost took it down.  After almost a year into the financial crisis, my biggest disappoint to date has been the lack of consolidation in the industry.  GM shedding a couple brands or even the VW-Porsche merger has not been the drastic consolidation that is still needed globally.  It still may happen once there is some stability in the markets.  

US Market Analysis

The main purpose of this article, is an update on the near term market outlook in the US.  GM has shown there was a direct relationship between new home construction and the sales of fullsize pickup trucks.  Last March I conducted a similar analysis based upon that relationship (See "A Going Concern" – The Global Auto Industry).  The purpose of tracking this relationship is GM  concluded historically sales of fullsize pickup trucks lead the recovery in vehicle sales with passenger vehicles following.  Pickup trucks have been shown to outpace the overall market in sales declines during a recession but also outpace the overall market in improved sales when the economy recovers.  At the time, the data suggested the market appeared to be reaching bottom but it was too early extrapolate further.  Back in May the analysis was updated with three additional three months of data (See 2009 US Auto Sales May Have Reached Bottom - Slow Recovery Expected).  That analysis showed it appears the market has at least hit bottom and was showing signs of stability.  With three additional months of data, this article will revisit this metric for possible insight into the market's direction.  

This article will also factor in what if any lasting impact the US government's Car Allowance Rebate System (CARS or Cash for Clunkers) will have on sales.  The Cash for Clunkers program went into effect late July.  As it stands now, the government allocated $3 billion to the incentive program which is design for consumers to exchange vehicles with poor fuel economy for new more efficient models.  The program will rebate dealers up to $4,500 depending on the efficiency of what is traded in by the consumer.  This program will subsidize approximately 750,000 vehicle sales.

The most recent sales data shows the Cash for Clunkers program had a direct positive effect on sales in July.  The sales rate for the month was 11.1 million and up from 9.5 million in June (Figure 1).  The program was all but out of money by the end of the month and congress allocated another $2 billion in August.  Earlier in July and prior to the Cash for Clunkers program being available, Edmunds anticipated a 10.5 million sales rate for the month. 

Beyond the good will the industry received from the program, sales were only up 17% over June. Yet sales were still down 20% compared with June 2008.  With sales being so low for so long, it did not take a lot to move the sales needle in the positive direction.  With the additional $2 billion allocated for the Cash for Clunkers program, sales could touch 12 million sales rate before the money runs out.  However, low inventories at the dealer could dampen the actual results even though the program has been expanded to include vehicles not inventory.  According to Automotive News inventory data, as of August 1st, there were only 1.8 million vehicles at dealers or about a 48 day supply.  Traditionally, the manufacturers maintain about a 60 – 70 day supply at the dealers.  The program did clean out some inventory because as of July 1st there were 2.2 million vehicles on the lots.  The low levels of inventory should help the manufactures as production will have to increase.  It should be noted that in July, manufacturers sold just under one million vehicles.  By comparison, in July 2001 the industry sold almost 1.4 million vehicles.

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

As with the prior studies, pickup trucks sales and new home starts continue to track (Figure 2).  After February of this year, both truck and home starts stabilized after the sharp free fall.  Moreover there does not appear to be any trend where pickup sales or home starts are increasing beyond some month to month variability.  This does not bode well for any significant recovery in auto sales in the near term.  With Cash for Clunkers incentive money available and the economic stimulus spending trickling into the economy, truck sales could increase but not appreciably.  

 Figure 2: Relationship Between New Housing Construction and Pickup Truck Sales - Click to enlarge

Pressure from the extremely weak state of the US economy will continue to suppress a sales recovery.  As illustrated in Figure 3, auto loan delinquencies are up significantly.   Indirect auto loans arranged through a third party such as an auto dealer have been creeping up since the start of the current recession in 2007.  However, direct loans are up 78% since the second quarter 2007 low.  At the end of the first quarter 2009 direct loan delinquencies were at 3.0%.  During the recession earlier this decade the direct loan delinquency rate was at a high of 2.56% in the first quarter 2003.  Given how fast the unemployment rate has increased since March of this year, it is very likely the delinquency rate in the second quarter could increase accordingly (Figure 4).

Figure 3: Historic Auto Loan Delinquencies in the US - Click to enlarge

According to data compiled by the American Bankers Association, the delinquency rate for recreation vehicle, mobile home, home equity, personal loan and bank cards has also increased with job loss being the number one driver.  Since July of last year, the unemployment rate has increased 62% from 5.8% to 9.4%.  It maybe to early to tell but unemployment may have stabilized at around 9.5%.  Based upon the increase in unemployment, the direct auto delinquency rate could come close to 4% in the second quarter when that data is released.

Figure 4: Historic US Unemployment Data - Click to enlarge

Unemployment and debt continue to stress the economic outlook as consumer bankruptcies also rise.  In July 2009 consumers filing bankruptcy protection increased 34.3% from the same period a year ago which is an 8.7% increase over the previous month according to the American Bankruptcy Institute.

Consumer confidence as measured by Conference Board also remains down.  Since June of 2007, Consumer Confidence has fallen from over 100 to 46.6 in July 2009.  July was down from the 49.3 the previous month.  Figure 5 illustrates the downward trend in the index up to 2008.  Currently consumer sentiment is up from lows in February and March when the index was around 30.  With the index well below the 100 baseline, it certainly does not appear that there will be a sharp rise in consumer spending as there continues to be uncertainty in the market.

Figure 5: Consumer Confidence Index - Click to enlarge


Cash for Clunkers created some needed excitement for the public, dealers and manufacturers and will most certainly run through the full $3 billion allocated to the program in the next few weeks.  The program help clear out already low levels of inventory at the dealers and as a results the manufacturers will have to begin ramping up production.  GM has just announced it will add 60,000 vehicles to its third and fourth quarter production schedule.  Ford made a similar announcement that they will increase production through the rest of the year by about 150,000 vehicles.  The added production will certainly improve the revenue picture.  As part of the increased production labor will be called up to work and the supply base will be kick off again.  However, it does appear that the manufacturers are not about to significantly ramp up production and are being very pragmatic. 

As of August 15th, North American production is down 47% from the start of the year.  At the end of July, sales in the US dropped 32% and inventories were at a record low of about 48 days.  The manufacturers have no choice but to add production because production was cut so sharply since early winter last year. 

Consumer demand is not driving the production increases but lack of inventory from the steep production cuts over the past eight months.  Cash for Clunkers drove some demand but it does not appear it will significantly change the momentum.  The above market analysis does not indicate consumers are ready to jump start vehicle sales. 

Unless Congress reauthorizes and loosens up the Cash for Clunkers program such as lowering fuel economy restriction,  I expect the recent blip in the SAAR to go down to the mid 10 million rate for the rest of the year once the money is exhausted.  There will not likely be a year-over-year sales increase until October or November at the earliest when the 2008 SAAR was 10.9 and 10.3 million, respectively.  August 2009 should be a very healthy month and sales may exceed August 2008 but at what cost to the SAAR for the rest of the year as sales are pulled ahead.  The economic indicators, such as unemployment, loan delinquencies and personal bankrucies do not appear to be improving and will continue to depress sales. 

Furthermore, given auto loan delinquicies and bankruptcies, the used car market could be flooded with product that drives down used vehicle prices.  This could also dampen any auto recovery.  Also, the auto market has likely oversold for about 10 years prior to the collapse.  As long as the economy remains weak, consumers will have plenty of vehicles at used car lots to choose from.  

Lastly, the data presented in Figure 2 shows a very differnt trend at the nadir than the historic data pickup truck sales in Figure 6 from a GM presentation.  The severe early 1980s recession resulted in a "V" shaped recovery in pickup trucks where today the market is still at the nadir months later and the recovery appears to be "L" shaped.  This is a very good indication the auto industry will not recover any time soon.  The market may be stable but serious growth toward pre-crisis levels may be years away. The doom in the industry might be over but the gloom will certainly persist for the rest of this year and likely into the next.  However, with inventories cleared, the manufacturers can build vehicles again but at a much lower rate.

Figure 6: Historic New Housing Construction and Pickup Truck Sales - Click to enlarge

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Sun Aug 23, 2009 7:52 am
Name: haypops | Comment: I think you are right that an L-shaped recovery is likely for both the general eonomy and the automotive industry. The recession has been to short to cause enough pent up demand for the auto segment to truly outperform the general economy?

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