Our regular CS FirstBoston mole has sent us an update on their analysis of the U.S. new car market. Bottom line: it’s going to get a lot worse before it gets even worserer. So, he asked rhetorically, is this a good time for the taxpayer to “loan” money to Chrysler and GM? Only if you define “good” as “worst possible.” Sorry, was I talking about ROI? My bad. In terms of bailing out automakers without a hope in hell of turning a profit for years to come, these are the good old days.
• We are slashing our forecast for 2009 light vehicle sales to 10.4 million units, down from 12.0 million units previously. Details of the changes in the factors that plug into our demand model and account for the revision are as follows:
• Unemployment rate. Labor market developments have been worse than expected, resulting in an increase in our 2009 unemployment rate forecast to 8.8%, from 8.2% (full year average).• Real income growth. Our forecast for 2009 real disposable personal income growth falls to 0.8%, from 2.5%, partly reflecting higher unemployment and partly as a result of a disappointing economic and tax stimulus package
• Home price growth. Our home price growth forecast slips to a decline of 7.0%, from our previous forecast of down 5.0%. The FHFA House Price Index posted a decline of 4.5% in 4Q08, and recent NAR data suggests declines are accelerating in Q1.
• The outlook for 2009 production is similarly impaired. We now expect North American output of 9.2 million units in 2009, down from our previous view of 10.6 million. We will introduce new quarterly production estimates in mid-April, as part of our Q1 earnings preview report.
• We are also issuing a revised longer term U.S. sales forecast calling for 12.5 million units in 2010 (down from prior 13.3 million) and 13.8 million units in 2010 (down from prior view of 14.1 million).
• Our new sales forecasts exclude any would-be effect from a possible scrappage program that provides government incentives for consumers to replace older vehicles with new, more fuel efficient models. The current proposal in Congress is likely to be viewed as expensive and protectionist, in our view, and faces formidable hurdles to becoming law.
• We also believe that the TALF program will not result in a meaningful increase in demand, as the deterioration in employment and consumer confidence may trump an increase in credit availability.
• Our Consumer Watch Scorecard was mixed in the latest update, with four factors improving and four deteriorating. The overall implications for light vehicle demand are still severely negative, with all eight Scorecard factors in the Minus column.
Thanks for cheering me up CS First Boston.
NickR:
The truth hurts.
I’d like to point out that, according to experts, a few years back housing prices had no place to go but up.
So, this is gold-plated (hmm, maybe not the best metaphor there…) advice that you can take to the bank.
BTW, Credit-Suisse lost $8 billion last year. Just saying…
I think I read somewhere that, at the current rate of replacement, every car sold will have to last for 25 years or something silly like that. I’m no economist, but I sense that we might be in for something of an auto sales boom in the next 3 years or so, depending on how long it takes for the economy to get on track.
That replacement rate number might be wrong, but there’s something to it. With auto sales down as low as they are, there’s gotta be some bounceback coming, it’s just a matter of when (and who will be around to sell us the cars).
I still think we are looking at a 9-10m unit/year market for at least the rest of this year, with perhaps a little upside next year.
It is going to take several years to make up for the long period of time in which 2-4 million more new units were being sold in excess of the vehicles being scrapped. Annual driving age population growth is probably nil, especially when you account for the number of people who are ageing out of driving in their later years. Young people are not nearly as car obsessed today (as a group) as they were a few decades ago. Costs are up, employment is down, and the desire to fund a household fleet larger than the number of actual drivers is down as well. Rental fleets are discovering that they can make more money putting 40k miles on their cars than they did by flipping ’em at 20k miles. Corporate and government fleets are cutting back.
The list of reasons goes on and on, but the fundamental answer is the same. CSFB is just getting around to the conclusions we were drawing here on TTAC months ago.
Careful and Frugal is suddenly the new fad. What a way for the Extinction of the Hummers to come about.
@kazoomaloo: The current average age for cars is 9.4 years and the annual scrappage rate for cars is 5.1%. Those are both consistent with an average 20 year life for cars.
For light trucks those numbers are 7.5 years and 6.1% but remember trucks were a much higher proportion of sales over the last decade than they were before the world went mad.
Link
There are about 235 million light vehicles in the US, about 135 million were cars. Applying the old scrappage rates to that inventory indicates about 12.75 million scrapped light vehicles. However, not every scrapped vehicle was a refugee from a demolition derby. If repairing is more attractive than scrapping, it will be done.
The number of cars is about 30 million more than the number of licensed drivers.
Basically, I think that a lot of folks will hang to the old buggy until it does the one hoss shay, or at least until they have paid off the last car, and their credit cards, and they are current on their mortgages, and they are not afraid of loosing their jobs.
I think we are looking at 2012 before car sales begin to get above the 10 million level. But I cannot promise that we will see levels above 12 to 13 million at any time real soon.
We are also issuing a revised longer term U.S. sales forecast calling for 12.5 million units in 2010 (down from prior 13.3 million) and 13.8 million units in 2010 (down from prior view of 14.1 million).
Someone got paid (and probably got a big bonus) for picking those numbers out of their ass, then picking more when it become obvious the first set were no more accurate than a reading from a cranky old psychic woman. And yet we go on about UAW workers being overpaid for producing a shoddy and unreliable product !
I know it gets dark and cold up there in the northeast for weeks and months on end as winter lingers into spring. And by the time Kentucky is green and SoCal is returning to 80s and sunny, northeastern gloom continues driving inhabitants to despair. I’m from your neighborhood. So pay no attention to this hand-wringing. The market will rebound more robustly than CSFB thinks. And don’t worry about this year. It’s going to be quite lean. The book is being written early and even a comeback 4th quarter won’t put bailout redemption on the horizon.
Today the Los Angeles Times buried a bit of seriously uplifting news. BofA and a number of more specialized competitors are creeping back into the market of jumbo mortgages in high threshold markets of coastal California, Florida and New York, at rates in the fives. While making requirements stringent, realistic market-rate loans in the $729,000 – $3,000,000 range will be proactively marketed. Jumbo financing has been all but frozen for over a year and has kept a lot of spending cash on the sidelines during our winter of discontent. Reviving jumbo financing puts a floor under arrested and eroding premium housing prices in markets where step-up homes became unfinancable. This is an engine slowly sparking back to life.
The US light vehicle market is not strictly utility-driven. Improvements to fuel economy and emissions combined with old-school motivators like design and affordability will spur latent re-emergence of a self-repairing new car purchasing market. The underlying assumptions of the CSFB outlook will be outrun by actual events before the end of Q3. Desire is a resilient friend and it will aid and abet lightening of America’s dreadnought fleet, but beyond that essential truth is the fact that unemployment will crest near 1982 recession levels, but with 73,000,000 more people in the US. I’ll chip in and buy a car before I urgently need one if you will. And mine will be from a Michigan-headquartered company.
Present is not future. We’re not going to have a Depression. Bailouts are bridge loans, not short term notes. If they finance orderly reform of the D3 we can put off repayment until the 2020s and the outcome will have been easily worth the marginal hundred billion or so floated to them in crisis.
We’ll be above 2007 levels by 2015.
Phil
CFSB= day late billions short. SAAR was pegged at those numbers a month ago.
@Phil The MSM and the not so main stream,could use a lot more Phil Ressler’s.I like your attitude sir.
How about citing the fact that MSRPs have gone steadily northward in the last 6 months, from GM to Honda. Is this a good climate to keep tagging incremental price increases?
Meanwhile, rebates for most cars applied have remained about the same in absolute amounts that they were 10+ years ago, when MSRPs were much less.
So how does raising prices in light of abounding inventory and consumer wariness help things exactly?
I think it’s funny that you still leave the “First Boston” name on the title after CS, even though it hasn’t really been used for a few years. It is, however, a good reminder of what happens to banks who makes a lot of bad bets and have to be bailed out: they cease to exist after being swallowed up by stronger players.
“Someone got paid…” His name is Chris Ceraso, and this, like most of his other reports, is fairly well done. Unlike a lot of sources, he does provide a lot of backup as to the underlying economic factors impacting auto sales, production and the relationship between the two.
I’m with Phil. The thing to remember is that even with 10% unemployment, the large majority of the workforce is still at work and they have needs and desires. Humans have a herd mentality. We live to follow the crowd. For the last few months the herd has been heading in the direction of frugality. But sooner or later, the herd will begin to change direction and the recession will end.
That’s not to say that there won’t be serious carnage in the auto industry. That’s inevitable. As is the shift in the makeup of the vehicles that will be bought in increasing numbers in years to come.
But the sun will rise again in the east. Count on it.
Phil – hope springs eternal, I wish you nothing but the best. However, I do have a question or two…
“The market will rebound more robustly than CSFB thinks.” Based on what? Just asking.
Desire is a resilient friend…” True. However, isn’t’ fear just as resilient?
“Reviving jumbo financing puts a floor under arrested and eroding premium housing prices…. This is an engine slowly sparking back to life.” Not so fast. Those who closely follow that market have a completely different opinion.
“We’re not going to have a Depression”. Agreed.
Bailouts are bridge loans, Not true. Just name one publicly announced repayment plan. A loan without a repayment plan is a bailout.
“I’ll chip in and buy a car …. And mine will be from a Michigan-headquartered company”. How are the rest of the guys down at the Union Hall? Seriously though, how is buying a Korean Chevy, or a Mexican Ford going to help US workers?
If they finance orderly reform of the D3 Nationalization? That’s a multi Billions $ “if” you got there….
It’s fine to disagree with the analysis from CS or anyone else for that matter – just bring some facts and statistics to the table.
I’ve pegged 2009 at 9.325M in Oct 2008 when GM was claiming half-again that. I’m holding with that number.
2010 will see a single-digit increase over 2009.
“The market will rebound more robustly than CSFB thinks.” Based on what? Just asking.
America is a growth country and is fundamentally optimistic, despite bouts of moodiness during crisis. I’ve been around long enough to see the self-referential media, finance and econometric communities repeatedly forecast the sunset of the American economy and the flatlining of opportunity only to be proven wrong quickly by actual events, for about 40 years running. Most contemporary reporting seems to reflect a total absence of institutional memory of the long malaise of the 1970s and the sharp contraction in 1980 and 82. Also missing is knowledge context for how severe 1974/5, 1990-93 and 2001/2 were in specific regions while the economy as a whole weathered milder downturns.
Most people of working age are working. Just as precipitous bad news prompts people to freeze, they get tired of feeling poor and become acutely sensitive to small signs of positive change, which a leading few make actionable, which in turn others see is safe, and the tide turns.
Desire is a resilient friend…” True. However, isn’t’ fear just as resilient?
No. Fear recurs and it’s fed by groupthink, but it isn’t our natural psychology. We have storms of damaging fear in America but confidence wins out to kill fear.
“Reviving jumbo financing puts a floor under arrested and eroding premium housing prices…. This is an engine slowly sparking back to life.” Not so fast. Those who closely follow that market have a completely different opinion.
Existing home sales are rising a bit, and the news about banks reviving jumbo financing to keep in their own portfolios is new. There will be hangover markets, like condo-rich Irvine and overbuilt markets like Orange County where intrinsic value was exceeded by the ambition of developers. A lot of 6000sf houses will see their value capped by their impracticality. But the negative long term view implied in your link is more informed by an “I told you so” mentality than by the fundamental realities of revived growth as we shake off the freeze-up. “Those who follow the market” are usually wrong about how long a boom lasts, and how long a bust persists.
Bailouts are bridge loans, Not true. Just name one publicly announced repayment plan. A loan without a repayment plan is a bailout.
Bailouts are bridge loans. Bridge loans *can* have delayed terms, with either ownership, stock conversion, or control defined in the meantime. The auto bailouts to date were funded in response to a cascading emergency. Repayment plans are better worked out by a calmer examination of circumstances. I’m not concerned. The bailout amounts aren’t proportionately large.
“I’ll chip in and buy a car …. And mine will be from a Michigan-headquartered company”. How are the rest of the guys down at the Union Hall? Seriously though, how is buying a Korean Chevy, or a Mexican Ford going to help US workers?
Who said anything about a Korean Chevy? This is a red herring. The total sales of Chevies made in Korea are mouse nuts to the overall domestic market. And Fusion is a NAFTA car with 50% US content and its purchase supports a thick layer of well-paying US headquarters jobs. You have Taurus and Malibu if you want to divert your dollars to higher-domestic impact D3 four-door mainstream sedans.
If they finance orderly reform of the D3 Nationalization? That’s a multi Billions $ “if” you got there….
Yes. In a $15T economy, an affordable if.
It’s fine to disagree with the analysis from CS or anyone else for that matter – just bring some facts and statistics to the table.
This is why CSFB and many others get things wrong: markets are emotional, not rational, and are not statistically-driven. There’s a different kind of factual record to pay attention to: the one that is now decades long that disproves the persistent pessimism of of Manhattan media and analysis. For the most part, the data heads have only been competent to tell us what happened in detail, after we already know it.
Phil
Someone got paid (and probably got a big bonus) for picking those numbers out of their ass, then picking more when it become obvious the first set were no more accurate than a reading from a cranky old psychic woman.
I’m no Wall Street analyst, but here’s the deal with analysts and their clients. Businesses & investors who need estimates of the future are not under the illusion that analysts can accurately predict the future like Nostradamus. But they are looking for an objective & knowledgeable 3rd party forecasts to assist with their own decision making.
The analyst should be bringing another perspective, other sources of information, access to your own competitors who won’t talk to you. And buying a report or subscribing to an analyst service is a hell of a lot cheaper than hiring your own staff of full time human beings to do the job for you in house — the economics are obvious.
The important thing (and where Wall St has had problems and also some of the large market research firms) is that the analyst needs to be objective, disinterested, and not have some hidden agenda. But no one expects them to have a crystal ball.
“The market will rebound more robustly than CSFB thinks.” Based on what? Just asking.
Most analysts tend to go with the flow. When times and the mood are good, as they usually are, few analysts are willing to predict that the party will end. Not many are willing to stick out their necks, when that encourages someone else to slice it off.
We are in a rare period when doom-and-gloom has become almost trendy. During times like this, don’t expect too many analysts to call the bottom, when that entails a risk. It’s easier to say that things are going to continue on their current path than it is to identify the turning point, when they’ll never hear the end of it if the latter predictions are proven wrong.
Let’s remember that these analysts tend to do a poor job of predicting changes in trends. Few of them predicted the bursting of the housing bubble, the decline of the stock markets, or the crash of the oil and commodities bubble. They didn’t see the top, so I have low expectations that most of them will identify the bottom.
That being said, I’m willing to agree that car sales are going to suck for most, if not all, of 2009. But we’ll recover after that, at which point sales should rebound fairly well. That won’t help Detroit, though, because they continue to make the same mistakes, no matter how good or bad the economy may be.
Phil – well said, allow me to expand on a couple of your comments….
I agree, the US economic model has been one of fundamental growth year after year. However, what Detroit is experiencing is closer to Creative Destruction. Given a long enough event horizon auto manufacturing (as a percentage of GDP) will more them likely return to historical levels – the catch is that it won’t resemble anything that we’re familiar with from the 1980’s and 90’s.
The impact of real estate on the auto market as a whole still has yet to be completely played out. Yes, there is are speculative overhangs in places like SoCal and Florida – but more importantly prices in the “normal” markets have also collapsed. Check out housing prices in in Cleavland, Detroit, actually anywhere in the mid west. That’s a lot of people.
It’s easy to be suspicious of analysts. At worst you can consider them a bunch of crooks – at best, they all look at the same data, using the same methodology, so it is not surprising that they come to the same conclusions. Garbage in/garbage out. So let’s look at what the real money (cash) is doing.
Take my long lost father Warren Buffet. It’s his cash – no debt, the he invests in companies. If your perspective is sound and Detroit is 18 months from an economic rebound then GM stock at $3 is a gift from the heavens. So why isn’t he buying car companies?
I could not help but notice that you did not provide any data on how GM and ChryCo are going to pay back the Gov’t money.Until they do, it’s a bailout. Don’t kid yourself. And before you say “It helps workers…pay taxes….reduce unemployment…” that argument is equally applicable to Honda’s made in Ohio. As discussed elsewhere on TTAC it’s not so much Domestic vs Imports anymore – rather Union v Non Union. If supporting Union workers is your objective – that’s fine, just be upfront about it.
CSFB neglected to mention the 800 pound gorilla in the room, that being our federal government’s insatiable predilection to fix the unbroken. Leave the markets alone and things will eventually get better. But saddle the market with insane dicta from the EPA about trace gasses and fanciful notions of 100 mpg cars from the children in Congress, and all bets on a recovery are off.
However, what Detroit is experiencing is closer to Creative Destruction. Given a long enough event horizon auto manufacturing (as a percentage of GDP) will more them likely return to historical levels – the catch is that it won’t resemble anything that we’re familiar with from the 1980’s and 90’s.
Steel remade itself. US chip companies (and I don’t mean Frito-Lay) remade themselves. Manufacturing as a whole expanded its percentage presence during the 1990s. We don’t have to duplicate the ’80s and ’90s in auto manufacturing to realize renewed domestic vigor in the sector. In fact, the 80s/90s should not be the aspiration. Detroit can, and should strive to, do better.
The impact of real estate on the auto market as a whole still has yet to be completely played out. Yes, there is are speculative overhangs in places like SoCal and Florida – but more importantly prices in the “normal” markets have also collapsed. Check out housing prices in in Cleavland, Detroit, actually anywhere in the mid west. That’s a lot of people.
A precipitous loss of housing wealth rattles people and then they eventually get accustomed to truncated market value and realize that their wages allow them to continue participating in the economy, after a period of adjustment. Moreover, housing will rebound, albeit unevenly according to location and type. I’ve been through this before, having a house in a coastal market decline in value below its purchase price and even under its mortgage value, then see value reflated in recovery some years later. In California, I figure a homeowner is vulnerable to being under water on their property in any three year period, but will be in the black for any ten year span. People can learn again to put housing in proper perspective.
People bought plenty of cars before it was easy to pay for them with extracted home equity. The car market will begin its recovery before housing does, as the habit of raiding equity to meet transportation needs fades and people revert to more normal and sustainable behavior. The transportation needs aren’t going to abate, population is growing, and reasonable credit will return.
Take my long lost father Warren Buffet. It’s his cash – no debt, the he invests in companies. If your perspective is sound and Detroit is 18 months from an economic rebound then GM stock at $3 is a gift from the heavens. So why isn’t he buying car companies?
GM’s rebound may take longer than 18 months. They may still struggle to keep market share in the early stages of an upturn. Even WB himself admits he’s wrong sometimes, missing an opportunity or making a bad bet. His history is in what he achieves through a portfolio, not as an oracle of certainty on every stock. To a lot of financial people, making cars is just too much work and is too content-intensive as a means of making money. Their witholding of capital is no indication of the economic value of the endeavor; only of their assignment of value to it. Is WB buying Honda or Toyota? No. He’s not playing the sector.
I could not help but notice that you did not provide any data on how GM and ChryCo are going to pay back the Gov’t money.Until they do, it’s a bailout. Don’t kid yourself. And before you say “It helps workers…pay taxes….reduce unemployment…” that argument is equally applicable to Honda’s made in Ohio.
A loan not otherwise available through the supposedly merit-based commercial finance sector is a bailout from both circumstantial trouble and prior mistakes. I have no reservation about the term “baoilout.” But bailouts are also bridge financing in this case, intended to provide operating cash through a market disruption and a period of wrenching reform. That the wrenching reform has been necessitated by prior mistakes is irrelevant. Once the decision was made to bridge these companies, the first focus is survival and stabilization. Then operating correction. Then revival of competitive postion. And finally path to profitability. In the earlier stages, the bridging entity cannot know enough about the latter stages to impose a repayment schedule. But the lack of one does not mean they can’t or won’t be repaid. And as I’ve written elsewhere here, I’d be happy to see 20, 30 or 40 year loan terms. I’m unconcerned about automotive bailout repayments at this time, both as an observer and a (substantial) American taxpayer. They are cheap defense against the greater aggregate costs of implosion.
As discussed elsewhere on TTAC it’s not so much Domestic vs Imports anymore – rather Union v Non Union. If supporting Union workers is your objective – that’s fine, just be upfront about it.
Just because it’s been discussed on TTAC doesn’t make it so.
I don’t have any specific agenda to support the UAW over other workers. I do however respect the economic leverage of US headquartered manufacturing, all other aspects being equal. Hondas made in Ohio aren’t equal to Malibus, as the total economic leverage of the Malibu purchase is greater. While it’s quite possible that any resurgence in Detroit’s market share would cut into Honda’s and possibly trade some Honda domestic employment for D3 jobs, the net is a gain to the overall economy.
Phil