Housing Will Wreck Detroit’s Turnaround For The Year

Most of the media’s attention regarding the car industry is directed at how badly sales will be in April. That is just the beginning of what could be a catastophic downturn in auto sales that may last the rest of this year and into next. As one Ford official told the FT: “The question is whether this is a one-month thing, or whether we’re heading towards a period of weaker consumer spending in the coming quarters.”

Detroit has done an admirable job of cutting jobs, and other production and marketing costs. But, the Big Three are now set up to make a small amount of money in a US market that moves 16 million new vehicles per year. The run rate of that number could drop as low as 15.7 million in April. And, if housing sales and mortgage defaults continue, that figure could go closer to 15 million. High gas prices do not help.

The sharp drop in sales hits Detroit at a time of guarded optimism. Ford’s (F) recent Q1 report showed a significant improvement in its North American operations, drive by cost cuts. DaimlerChysler (DCX) appears to have found interested buyers for its Chrysler unit. And, GM has now taken $9 billion a year out of its North American cost base.

But, a year-long drop in vehicle sales could wipe all of that out. The car companies are cutting fleet sales because they cannot make money on cars sold to entities like car rental operators. This makes sales figures seem lower, but it increases profit-per-unit for the automotive industry as a whole.

The recovery in Detroit has been thin since GM started its restructuring in early 2006. The UAW always had to go along, but it cannot afford much more erosion in its employee base. Not if it is to have any relevance as a bargaining entity.

So, all the restructuring, job losses and new products now hang by a thread. Housing can hurt cars sales, but car sales cannot hurt housing. Consumers can always put off buying a new car for one more year.

Douglas A. McIntyre