U.S. Drivers Hold On to Autos, Shun Showrooms on Job-Loss Risk

Jan. 10 (Bloomberg) -- Drivers rattled by the worst U.S. labor market since World War II are hanging on to old autos longer instead of buying new models, threatening to crimp sales again in 2009 after demand plummeted to a 16-year low.

Used vehicles being traded in at dealerships averaged 6.3 years of age after the Wall Street meltdown in late 2008, about 6 months older than before the crisis, according to forecaster J.D. Power & Associates in Troy, Michigan.

“The bankruptcy of Lehman Brothers in September and other financial catastrophes have completely broken consumer confidence,” said Chief Executive Officer Mike Jackson of AutoNation Inc., the biggest U.S. new-car retailer. “People are losing money in ways never thought possible. They’re shook up.”

Yesterday’s unemployment report deepened the industry gloom before next week’s Detroit auto show, with 2008 U.S. job losses marking the biggest annual drop in payrolls in 63 years. General Motors Corp. and Chrysler LLC, which just won $13.4 billion in U.S. loans, are at risk of collapse should sales fall further.

“The key statistic affecting car sales now is job loss,” said Ken Goldstein, an economist for the Conference Board. The New York-based research group’s index of consumer confidence fell to the lowest in 40 years of record keeping in December.

U.S. industrywide sales plunged 18 percent last year to 13.2 million, heralding a possible 2009 slide for automakers including GM, Chrysler and Ford Motor Co. GM reiterated Jan. 5 it expects a U.S. market of 10.5 million to 12 million units.

‘Write More Checks’

“If the industry sells fewer than 12 million vehicles this year, the government will have to write more checks” to bail out automakers, said John Casesa, a partner at consulting firm Casesa Shapiro Group in New York. “Otherwise GM, Ford and Chrysler will be gone, bankrupt.”

Kimberly Rodriguez, co-leader of the global automotive practice for consulting firm Grant Thornton, said the U.S. market may shrink 10 percent to 15 percent more in 2009.

As many as 20 GM, Ford and Chrysler assembly plants “are at risk of further downtime or outright closure,” said Rodriguez, who is based in Southfield, Michigan.

Ford expects industry sales of 12.5 million units, keeping the automaker “above minimum cash levels, nothwithstanding further degrading of the economy that could cause other factors, like weak pricing,” spokesman Mark Truby said.

A GM spokesman, Greg Martin, said the Treasury Department’s pledge for U.S. loans and $6 billion to prop up lender GMAC LLC will meet “our liquidity needs under the scenarios outlined in our December plan to Congress.”

U.S. Deadline

GM and Chrysler face a March 31 deadline to give the government with survival plans to prove that they can repay their loans. They’re counting on paring payrolls, shedding plants and brands, and closing dealers to help keep operating until new, cost-saving labor accords kick in next year.

Buyers skittish about an unemployment rate at 7.2 percent in December, a 15-year high, put that strategy in peril.

“The two big issues for car buyers are concern about future income and job prospects,” said Richard Curtin, director of consumer surveys for the University of Michigan in Ann Arbor, which works with Reuters to track consumer sentiment.

South Korea’s Hyundai Motor Co. is trying to allay that sense of alarm with a promotion unveiled Jan. 6 to buy back newly purchased autos from U.S. customers who lose their jobs. At Suburban Chevrolet in Stuart, Florida, monthly sales are about 80 vehicles, instead of 125 as would be expected without a recession, General Manager Don Miller said.

“Most people who come in want to buy and can buy,” Miller said. “But there are fewer coming in, so I’m fishing in a smaller pond.”

Fuel’s Rise, Fall

U.S. vehicle sales began to weaken in mid-2007, amid a drop in leading economic indicators, signs of tightening credit and falling home values. The auto-market contraction accelerated in mid-2008 as gasoline surged to a record $4.11 a gallon in July.

Buyers also switched to smaller cars from higher-profit full-size trucks such as Chevrolet’s Silverado pickup and Ford’s Expedition sport-utility vehicle. The average transaction price of new vehicles in December was $26,743, almost 6 percent less than a year earlier, according to J.D. Power.

A 69 percent collapse in oil prices by year’s end from the July peak couldn’t jump-start new-vehicle demand, as U.S. sales tumbled at least 25 percent in each of the last four months of 2008.

“Even with a drop in the price of gasoline, families aren’t changing their decision to keep running the old car,” said the Conference Board’s Goldstein.

Nor will steps such as an easing of credit standards at lender GMAC be enough on their own to revive showroom traffic, said Tom Libby, a J.D. Power analyst.

“Just because GMAC has become a bit more lenient, it’s not like a light switch,” Libby said. “It will take economic stability to reignite car buying, it will take some calm. That’s what a shopper needs for the confidence to spend $26,000.”

To contact the reporter on this story: Doron Levin in Southfield, Michigan, at dlevin5@bloomberg.net

To contact the editor responsible for this story: Jamie Butters at Jbutters@bloomberg.net