The press and the business community clearly want large US car companies Ford (F) and GM (GM) to prevail in their struggles to reshape themselves as smaller, profitable companies. They are icons of American industry but they could live on in miniature.

But, the future of both companies is probably already written. Their recent earnings reports have been good. Overseas sales have become important. Costs are way down.

The UAW must give a lot in the current negotiations. Whether that will be large concessions on job cuts or a drop in benefits is not clear year. They may have to take on part of the funding and management of pension and benefits liabilities. But, the union has to give. It has become a partner in the survival of its employers, whether it likes that fact or not.

Detroit’s North American expenses will drop again. Wall St. can take that to the bank.

But, sales will fall too much over the next two years to make that matter enough. The US car companies would like investors to believe that part of the double-digit drops in sales is because they are selling fewer vehicles to rental companies. Those units don’t make any money. Even with these sales factored out, the year-over-year drop for Ford and GM is still in the 10% to 15% range, and that rate appears to be increasing. July is expected to be another bad month.

Several factors are conspiring against a Detroit comeback. Housing is worse than almost anyone wanted to believe. There will be a cascade of defaults around the country as variable rate mortgages reset. And, with oil at $78 a barrel and little on the supply side to help bring it down, the cost of operating a car is going to get higher.

The Japanese have a two or three year head start on marketing attractive, smaller cars and hybrids. That lead is simply too big. If Detroit can retool its model lines between now and the 2010 model year, it will be a minor miracle. It really can’t afford another 30 months of sales drops.

No one wants to believe that the chance for bankruptcy at GM or Ford is just as high as it was two years ago. Unfortunately, it probably is. The last quarter and the next one will not show that, but falling sales are the canary in the coal mine.

Douglas A. McIntyre can be reached at [email protected]. He does not own securities in companies that he writes about.

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