Honda’s Profits: The Risk Of A US Recovery

Honda Motor (NYSE: HMC) announced it third quarter earnings and raised it full-year net income forecast to 530 billion yen from 500 billion.

Honda said its optimism was based on US sales and its success in emerging markets. That will be offset, probably, by the value of the yen and weak sales in its home market.

The risk to Honda’s success is the recovery of the US market more than in  the chances of faltering emerging market sales or the yen’s value. The downgrade of Japan’s debt to Aa- by Moody’s  has had an impact. Estimates of Japan’s deficit and trade data are unlikely to change much.

The recovery in American car sales could stall as quickly as it began. U.S. car sales fell by a third in 2008 to 13.2 million. The number dropped to 10.4 million in 2009, the lowest level in 27 years. The 2010 recovery was modest as units sold moved to 11.6 million.

The recovery of the economy in America is uneven and could dissolve. Unemployment rates are not expected to come down this year.  The housing crisis is still spreading and deepening, which cuts household net worths more each month. The greatest new threat to the recovery was unexpected. Brent crude is nearly $100. More trouble in the Middle East or a sharp increase in the demand of China and other large emerging nations could push oil above the century mark for some time. Most economic forecasts for GDP recovery were based on $70 or $80 oil. Many American households will have renewed financial difficulties if the price of gasoline moves back to $4 for any extended period and home heating oil prices jump higher than many people can easily afford.

Honda is not alone. The global recovery of car sales and the industry depends on US and China sales much than those anywhere else. Between the two nations, car and light vehicle sales are nearly 20 million. China faces inflation which could be well above expectations. A number of economists believe that figures given out by the People’s Republic are wrong. Core inflation in China may already be above 10%. The extent to which that will erode consumer spending power is significant.

Honda’s forecasts may be built on feet of clay. The global recovery in the auto industry looks more uncertain today than it did a month ago. The signs point to the problems getting even worse.

Douglas A. McIntyre