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Car Sales: Still Vrooming

Economic Trends

Car Sales: Still Vrooming

Next year could set a record

With 1999 the sixth consecutive year for strong auto and light truck sales, many economists are looking for consumers to take a breather. But the red-hot auto market shouldn't cool off anytime soon, argues David L. Littmann, chief economist at Comerica Inc., a Detroit-based bank. Littmann predicts that the combination of an aging auto fleet, falling car prices, and a robust economy will push total unit sales up from an expected 16 million units this year to 16.5 million units in 2000. That would surpass 1986's record of 16.3 million.

Part of the strong demand is due to the need to replace old vehicles. Despite the buying binge of recent years, Littmann estimates that by next year, consumers will have owned their cars for a median of 8.4 years, up from 7.7 in 1995. In part, that's because vehicles have become more reliable. But it's also true that the economic boom has lasted long enough that vehicles bought early in the expansion are now ready to be replaced.

Equally important, Comerica's auto-affordability index shows that motor vehicles are at their most affordable level for U.S. consumers in 19 years. That's due partly to falling prices: New-car and truck prices fell 0.1% from last year, despite the strong demand. Competition, rising productivity, and the declining costs of raw materials such as steel have helped hold the line on auto prices.

The other powerful driver behind the robust demand for autos is income growth. Comerica estimates that real disposable income must rise by at least 2.7% annually for consumers to keep buying autos at the current pace. Real income grew 4.6% in the first quarter of this year and should rise at least 3% next year, Littmann says. Adding to the expected strength: reviving economies overseas that will buoy auto exports from the U.S.By Laura CohnReturn to top

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A Case of False Modesty

Why earnings estimates are low

Companies in the U.S. are more likely to lowball expectations of future earnings than are companies in other nations, according to a study by Lawrence D. Brown of Georgia State University and Huong Ngo Higgins of Worcester Polytechnic Institute.

After examining the corporate reporting practices of 14 nations during 1995-1997, Brown finds that U.S. companies tend to play what he calls the "profit surprise game" to create "a little bit of good news" for the stock price. A separate study Brown conducted of earnings-release practices only in the U.S. found that managing earnings expectations has become more pervasive over time, particularly for high-growth companies.

Moreover, compared with businesses in other countries, U.S. companies are also more likely to warn investors of the possibility of a bad earnings report. This is done to "prevent managers from getting sued if they withhold bad news from investors," Brown says. As a result, when unexpected losses do occur, only 47% of those that happen in the U.S. are "extreme" (defined as a shortfall in annual earnings per share larger than 4% of the stock price). By comparison, in the 13 other countries studied about 70% of unexpected losses were extreme.By Laura CohnReturn to top

No Need to Cry over Argentina

U.S. stocks won't be hurt much

Argentina, Latin America's second-largest economy, is heading into a deep recession this year, but don't look for much impact on the U.S. stock market. Despite its size and proximity, Argentina no longer figures prominently into the bottom line of many U.S. companies, note analysts at Morgan Stanley Dean Witter in New York.

As recently as 1996, U.S. companies earned nearly a billion dollars from their operations in Argentina. But by last year, that figure had declined by about one-third. Now, Argentina makes up just 5.4% of the income U.S. affiliates receive in Latin America, down from a peak of 8.6% in 1991, according to Joseph P. Quinlan and Andrea L. Prochniak, economists at Morgan Stanley.

To be sure, some industries, including food and beverage manufacturers, are still vulnerable to Argentina's woes. But even if Argentina's gross domestic product contracts by 3.5% in 1999, as the Morgan Stanley economists now expect, the overall damage to U.S. companies should be small.By Laura CohnReturn to top

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