European Car Sales Fly Into Reverse — an Omen for the U.S.?

Car sales in Europe fell last month for the first time in five months. It is no wonder. The economy in the region has approached the level of ruin. Most nations in the eurozone are either in a recession or close to one. What has happened in Europe could easily happen in the U.S., if the economic downturn hurts American GDP.

The European Automobile Manufacturers Association reported that November sales dropped 3% to 1.07 million. Car and light truck sales are a little more than that each month in America. Europe and the U.S. are no longer the largest car markets — China is. But the effects of sales from Europe are still profound for local firms and companies like General Motors (NYSE: GM), which operates in most developed and developing nations.

November auto sales declined in France, Italy, Spain and the UK. Only Germany, the strongest and largest economy in the region, supported an increase. Italy, Spain and the UK are probably in a period of economic contraction, which will not be helped by new higher tax rates and austerity measures meant to bring down national deficits in those nations.

The U.S. economy may have begun to recover. However, everyone from Federal Reserve chairman Ben Bernanke to Nobel Prize winning economist Paul Krugman worry that it will only take a one or two events to initiate another American recession. A further drop in Europe’s GDP could be a trigger, or a further drop in the U.S. housing market, or the effects of austerity measures currently before Congress. The reasons for a downturn are as numerous as those that would sustain a recovery.

Car and light vehicle sales in the U.S. in 2005 and 2006 numbered more than 16 million. That figure dropped to 9 million in 2009. The economic recovery has helped move annual sales above 13 million this year. It will not take many signs that the income of the American consumer is in trouble to get that consumer to hold on to his current car for another year. All it would take to undermine the growth of auto manufacturers is a few hundred thousand people who will not trade in what they own for a new vehicle next year.

Douglas A. McIntyre