Why A Recovery Won't Shift Detroit Into OverdriveDavid Woodruff
With wear and tear from three children beginning to show on Phyllis and Joseph Priola's 1987 Dodge Caravan, the suburban Chicago family was thinking of trading in the minivan. But the economy is still sluggish, and they have two other cars to fall back on, so they're standing pat. "We're not going to make any more big investments right now," says Phyllis.
The Priolas are in good company. Millions of potential car buyers have hung on to their old wheels in the past year and a half, sending car sales skidding. In November, they fell 7% below last year's already depressed level. And an upturn seems as distant as ever. "We're likely to see consumers remain very cautious spenders," says Richard T. Curtin, a University of Michigan economist whose November survey of consumer confidence hit its lowest point since the Persian Gulf war.
COMES LOADED. Traditionally, a prolonged sales drought creates pent-up demand. When the economy gets moving again, consumers come back in a flood. With many of the 31.4 million cars and trucks sold in the boom years of 1985 and 1986 overdue for replacement, that demand may be as high as 4 million cars and trucks, estimates John V. Kirnan, an analyst with Kidder, Peabody & Co. in New York. And again, carmakers are hoping for a tidal wave of buying, once the economy gets off dead center.
This time around, though, that bulge in demand may be part mirage. High prices put many new cars out of reach of debt-laden consumers. Better quality in the 1980s means cars don't need to be replaced as often. And used-car sales are booming. All that means new-car sales "are not going to be leading us out of the recession, as they have in the past," says Thomas C. Webb, chief economist with the National Automobile Dealers Assn. Faced with that gloomy outlook, carmakers are paring back production.
Most of the problem comes down to money. New cars are crammed with expensive features such as airbags, antilock brakes, and fancy new electronics. The extras have boosted the average cost of a car to more than $16,000, twice the figure of a decade ago. And paychecks haven't kept pace. It now takes the average family 24.5 weeks of gross income to pay for a new car, up from 18.7 in 1980, according to the Commerce Dept. On top of that, consumers are still crushed by short-term debt.
Buyers often can't come up with the needed downpayment, either. In the past, the trade-in on an old car often did the trick. But the popularity of long-term loans in the 1980s means that cars sometimes lose their value just as fast as consumers can pay the loan off. The owner trading in an average 1988 car would net only about $850 after paying off a five-year loan, figures Webb. That's just 5% of the average cost of a new car and well below the 20% downpayment that many banks and credit companies require these days. Rebates often don't make up the difference.
Auto makers themselves are partly responsible for undercutting demand. Easy credit from captive finance arms in the late 1980s artificially propped up sales. Also, to keep factories running, auto companies now regularly push more than a million new cars a year through daily rental fleets. The vehicles show up at dealerships four to six months later as "nearly new" used cars. All those late-model vehicles on the lots have created a robust used-car business that steals new-car sales. As a result, the median age of cars on the road has fallen to 6.5 years (chart), not enough to generate strong demand.
LESS RUST. Those cars and trucks last longer than ever, too, making it easier for consumers to put off purchasing a new one. Auto makers beefed up rustproofing during the 1980s, so road salt doesn't eat away as many auto bodies. And defects are one-fifth what they were a decade ago, meaning cars break down less frequently than they used to. "A six-year-old car today is still a pretty darn good automobile," says George C. Peterson, president of AutoPacific Group, a California-based market researcher.
With the sales outlook so dismal, manufacturers are rolling back production goals. In late November, U. S. auto makers, including Japanese-run transplant factories, cut 184,000 cars and trucks from their first-quarter schedules, a 7.3% reduction, according to Ward's Automotive Reports, a trade weekly. The cutbacks will make it very hard for the Big Three to make money in the first quarter, since profits are booked when cars are built, rather than when they leave the showroom.
Still, auto executives remain confident that sales will pick up in the second half of next year, then really jump in 1993. They're assuming they can convince customers such as the Priolas that they need -- and can afford -- a new car. Even if the economy perks up next spring, that's a dubious assumption.