My greatest concern for the financial health of GM and Ford has less to do about the success of Toyota and Honda and more to do what could be a profound decline in the national housing market within the next year. Sure some of the hottest housing markets that saw prices double and triple over the last 5 years will correct, but many home markets that never saw the huge gains over the last 4 years are the first to see declines according to some news articles.

Even during the last 4 years of economic expansion neither Ford nor GM did that well. Sure they have a few success stories in a couple of different segments, but neither of them have been able produce stellar profits during good economic times and one could conclude they wont fair as well in harder economic times.

The economic boom of the last 4 years had 3 major catalysts which were (1) tax cuts, (2) the Federal reserve cutting interest rates, and most importantly a (3) booming housing market (caused by the fed cutting rates to historical lows). The thing that made the housing market so profound over the last 4 years is that it allowed people to pull money out of their homes and refinance at a lower rate (consolidate debt) so they could buy cars and etc. More importantly it had a psychological effect by giving people a good feeling of wealth and prosperity even when it might not be entirely valid or deserved. Those feelings of wealth helped people feel good enough to go back to the stores and start buying stuff which helped make the recession of 2001-2002 be one of the mildest and shortest in recent history and that buying spree hasn’t stopped since.

The housing market (construction, realtors, mortgage industry, and etc) makes up nearly 20% of the US economy while 2/3rds of the economy is driven by retail consumption. If the housing market continues to slide then the US economy could expect to lose a significant part of those jobs related to housing. What’s worse is that I genuinely believe that the economic boom of the last 4 years that allowed so many people to buy cars @ 0% interest has been driven by the wealth effect caused by rapidly increasing home prices. If home prices decline significantly over the next year then retail spending would most likely suffer significantly and so would many of the jobs that are directly related.

While the 3 main catalysts I mentioned previously helped the economy recover quickly after a stock market meltdown of 2000 and terror attacks of 2001, I don’t believe there will be any quick fixes when hard times hit next. Lower tax rates and historically low interest rates are already ‘baked into the cake’ and even if interest rates were reduced again in 2007 it would not have the same huge impact like it did in 2002. Raising taxes and interest rates certainly would do more harm then good and in fact could makes things significantly worse.

So my question is how can GM and Ford expect to do better financially when the economy is most likely going to get worse (not better) over the next year or two. If GM and Ford couldn’t make a ton of money over the last 4 years, how do they expect to do better over the next few years? Sure they will have better cars in the coming years (honestly- what automaker wont have better cars?) and they will certainly close down some factories and renegotiate union contracts, but if Americans don’t have the extra money to buy a new car then it won’t mean squat.

This is not even taking into consideration GM’s huge exposure and/or risk connected to the housing market through their mortgage business via GMAC. In fact it was the profits generated from GMAC over the last 4 years that was funding GM’s car business and I really hope GM closes the sale of that huge portion of GMAC before the end of the year.

I’m not saying that hard economic times are a certainty or that they would last forever (I’m just GM fan on a Camaro website), only that the next 2-4 years could be very rough for many and I just want people to be aware of what ‘could’ happen.

 

Interesting post. Let's hope it doesn't play out that badly.

 

I think part of what will help GM is its overseas markets, specifically China and Holden. GME turned a small profit last year, I think it did anyways. China is booming for GM at the moment and lets hope it stays that way. If GM is going to be leveraging its overseas markets and it can reduce its employee load then it can weather a small crisis in the economy. If the Union decides to play hardball, not to be expected seeing how they are cooperating with GM even now, then it could be a VERY bad thing. Also considering GM's core brand, Chevrolet, is a value brand we may actually see an increase in marketshare because people who feel they need a new car, or truck, may be more likely to go with a value model rather than stretching the budget to get that upmarket model, think BMW 3 series or G35. The upper level brands Caddy, BMW, Mercedes-Benz, and Lexus will likely not even feel the effect of this on most of their models. They may not feel it at all. The midlevel marques are the ones that will feel the pinch, IMO.

 

It never hurts to hope for the best, but plan for the worst.


So true.

My concern is that one significant reason why both China and India have been booming over the last 5 years is directly related to the American consumers spending spree over the last 5 years. Im willing to bet the last 5 years saw Americans buying more 'non-American' goods then ever before.

If you consider how much cheaper Chinese made goods that are sold via Wal-Mart when compared to similar non-Chinese products sold just 10 years ago(when adusted for inflation) one would realize that its the American consumer who is keeping a lot of those Chinese factories and Indian call centers running at capacity and sustaining the global economy.

$100 American dollars ten years ago could have bought 5 USA-made trinkets but now that same $100 can buy 10 Chinese-made trinkets and keep 10 Chinese factories in business who will now employ twice as many people and use twice as much material and resources which is most likely a main cause that has driven commodity (oil, steel, copper, and etc) prices up so rapidly in the last few years.

Japan is having a similar problem where the annual cost of 1 Japanese engineer could now get you 3 Chinese engineers plus a fully operational call center in India.

The Chinese economy has boomed because businesses have invested huge amounts of their profits over there to set up new factories to either cut costs of products that will be shipped back to the US and/or to have access to the rapidly growing Chinese domestic economy.

My concern is if the American consumer significantly slows down their retail buying then it would not only hurt the US economy but it could have even a more significant impact on both the Chinese and Indian economies. A huge spike of unemployment in either China and India would only create instability in those regions which is a different subject all together.


some related articles

Drop in spending could drag down overall economy –
http://www.msnbc.msn.com/id/14515702/

Four myths about the future of home prices.
http://money.cnn.com/2006/08/24/real...tune/index.htm

Bernanke Urges Restraint on Protectionism
http://www.foxnews.com/story/0,2933,...siness/economy

Newsweek - Unwinding the Credit Boom
http://www.msnbc.msn.com/id/14504791/site/newsweek/

 

I saw an interesting graph from one of the "big" automotive marketing data firms that plotted housing sales vs. pickup truck sales. Since 1988, the two have tracked almost perfectly, with truck sales usually lagging about about six months. Combine this trend with truck sales that are already soft due to gas prices, and this does not bode well for automakers (or anyone else in the economy).

There are several other factors that do not look good for the economy as a whole, related to the lack of consumer savings and the Fed's tendencies to go overboard with interest rate hikes. The question now seems to be a matter of "when" rather than "if", and I've seen some say that a recession could be coming as soon as the end of '06 or early '07, while others are seeing it happen sometime around '08. In either case, it doesn't look like the economy as a whole will be severely affected, but several industries are going to take it on the chin. I mean, come on - who didn't see this coming for the housing industry?

 

When you consider that many Americans moved into larger homes (or renovated their existing home) over the last 5 years and spent the last five years filling those larger homes with more 'stuff' (possibly bought at Wal-mart) and added new cars to the garage.

In 1950, the average home in the US only had 2 bedrooms & 1 bath and was under 1,000 square feet and in 1973 the average square feet was 1,660. Today, the average home has 3 bedrooms, a 2-car garage and occupies about 2,400 square feet.

Ironically homes have become larger over the years but married couples in the US are having fewer and fewer kids. Married couples have replaced rooms designed for kids and instead filled them with more 'stuff'.

The trend could change over the next few years as baby-boomers begin to downsize and sell-off their large trophy homes they bought and/or remodeled over the last decade and move into smaller places and cut back their spending on 'stuff' and redirect it towards medicines and etc.`

Decades from now this time period will most likely be viewed as the "Wal-mart, Super-sized, SUV, McMansion" era

http://money.cnn.com/2006/07/24/real...hing/index.htm