Pessimism is rampant. The result is that forecasts of 2009 new-vehicle sales might be too low by 1 million units. Let me explain.
Forecasters were burned in 2008. The two most consistently correct economic predictions a year ago were that energy prices would soar and the dollar would weaken. The first was right only up to the July $147-per-barrel crude oil price peak, but the price collapsed to below $40 by year end. Similarly, a weakening U.S. dollar forecast looked good until the dollar became a safe haven and rallied 23 percent from trough to peak.
Without historical points of comparison, forecasts of vehicle sales get trapped in general recessionary data.
How does one isolate what will affect vehicle sales in the coming year? What data are essential to watch when so many predictions were dead wrong a year ago? Specifically, how will the automotive industry do better than the consensus forecasts?
For the U.S. automotive industry, the 2009 outlook is maximum uncertain. The consensus light-vehicle sales forecast is in the range of 10.5 to 11.3 million vehicles, down 2 million units from 2008 and down 5 million from 2007.
That consensus, I believe, is too pessimistic by at least a million units. We should top 13 million sales with some selling periods exceeding 14 million sales rates.
3 effects to expect
1. First, the U.S. money supply growth should spur stronger economic growth by July. The 37 percent jump in money supply from August to November 2008 as measured by M1 (a broad measure of the dollars in the economy) is an explosion that has to have a bang.
Monetarists would expect the impact of this money spike about 6 months later. So in six to nine months, credit should be flowing more freely. That means the second half of 2009 will be the start of a recovery. Therefore, expect to hear the bleakest forecasts at the beginning of the year but know they will improve by summer.
2. Add the fiscal push from the Obama stimulus package approaching $1 trillion that will be passed by March. Its impact will hit in the second quarter.
Add to these boosts for credit, jobs and income and the fact that energy price drops are like tax cuts: They put money in consumers hands. The energy price drop is the equivalent of a tax cut equaling more than $600 billion on an annualized basis. That helps budgets and confidence.
Last month, buyer confidence hit an all-time low, according to the Conference Board Consumer Confidence Index. According to J.D. Power and Associates, two-thirds of the drop in new-vehicle sales is explained by delayed purchases (four months or more). The other third is the drop in leasing. Increased consumer confidence and more credit availability to consumers and to dealers will start to reverse those trends by the latter part of 2009.
3. The gasoline price drop also creates real equity in used vehicles. The 2008 real drop in used-vehicle prices (12.2 percent, according to the Manheim Used Vehicle Value Index) is mostly over. The new-vehicle sales plunge intensifies interest in used vehicles. Inventories at dealerships and in auction lines will stabilize.
3 swing factors to watch closely
1. First is local housing sales. The heart of the confidence drop was that the two largest components of household net worth -- housing prices and investment portfolios -- dropped simultaneously by double digits in 2008. This was the first time that happened since the Great Depression.
Housing looks bad, but not all parts of the country are equally depressed. As Alan Greenspan repeatedly points out, all real estate is local. For executives looking to less leveraged real estate markets like the broad Midwest and major cities outside the previously hottest markets, steadying house values should follow any sales uptick.
Ironically, any increase in house sales might boost the inventory of houses back on the market as sellers re-enter to find buyers. But it is the increased house sales rates that define a real estate bottom in local markets.
2. In 2009, watch Chinas social and economic stability. Watch Chinas central government as it continues to stimulate its economy. China unveiled an economy stimulus package last month with a total of 4 trillion yuan ($586 billion), equivalent to nearly 78 percent of last years national tax receipts, to be invested in the next two years to boost domestic demand and improve quality of life.
These infrastructure investments also are aimed at spurring job growth and to avoid internal dissent from disenchanted consumers (shoddy buildings in earthquake areas, poisoned milk, etc). With more than $1.3 trillion in U.S.-denominated reserves, the Chinese economy has a strong link to the U.S. economy. The Chinese paying for their investments with any large sale of U.S.-denominated investments will weaken the U.S. dollar. A weak U.S. dollar might spur other nations to adjust currencies downward. Chinas large foreign currency reserves in U.S. dollars make China vulnerable to a strengthening of the yuan (or from any future rise in U.S. interest rates).
3. Finally, watch the U.S. government actions because tough times might lead to bad legislative results. The capitalistic underpinnings of our economy have been compromised to save the economy. This should be a temporary event. If the direction of Congress, however, is to treat automotive and financial industries as nationalized entities that must be consolidated and reorganized, such actions might permanently deepen Washingtons reach.
That would ultimately retard U.S. economic resiliency. Governments do not create wealth or income. Nor should governments try to operate markets or design cars. The less the government tries to control or regulate individuals money, the more efficient nations are at spurring opportunities and building sustainable economic strength.
Remember where you heard it
The story of 2009 should be that the recovery begun in the United States in the second half of the year will pull other nations out of further steep declines. China and the interdependent economies of Europe will likely grow in 2010.
The United States dropped into the credit crisis first. The cumulative effects of U.S. money growth, global energy price drops and fiscal stimulus will position the United States to be the first to show signs of a recovery.
Our climb back may take several years, but it will begin in 2009.