Car Industry Recovery Could Stumble With Wall Street Anxiety

Shaky consumer confidence has taken another hit with a downgrade of the U.S. credit rating, and many now think U.S. auto sales will fail to reach thirteen million this year, as analysts and automakers had projected.

While the industry is worried — though not as spooked as investors — car makers are cautiously clinging to forecasts of a fragile recovery. They face challenges that include higher material costs and concerns that credit will dry up. Add to that the plummeting value of investment portfolios, which may keep consumers from buying until their financial future appears more secure.

"This kind of drop in stock prices impacts consumer confidence, which naturally impacts people's desire to buy a Michigan export like a car," said David Sowerby, Portfolio Manager for Loomis, Sayles & Co. L.P., Investment Management. "People are watching what's happening to their net worth, and they're going to eventually delay and wait and see what's going on with the stock market before they jump in."

Economist Charles Chesbrough at IHS Automotive Inc. thinks the year will end up closer to 12.5 million sales, with slower growth in the second half of the year. High unemployment will continue to fuel uncertainty and reluctance to borrow money for big purchases like cars, he said.

At this point, General Motors Co., Ford Motor Co., and Chrysler Group LLC are sticking to their bullish sales forecasts. GM and Ford remain steadfast in their thirteen million to 13.5 million U.S. sales forecast, while Chrysler is more modest, adhering to the 12.7 million sales rate it forecast in 2009.

As labor talks continue between the Detroit automakers and the United Auto Workers, the parties do not think the worsening economy is a big factor in reaching a new contract.

UAW President Bob King said the union continues to work with the companies to secure long-term job commitments. "All I expect of the company is if they make a commitment, they're going to do everything possible to live up to it," King said last week. "If outside circumstances intervene that they can't (meet commitments) then we sit down and figure out an alternative solution."

Lacey Plache, Chief Economist at automotive research website Edmunds.com in Santa Monica, Calif., does not think the market nosedive will hurt the industry. "All market factors suggest that credit will remain available, that interest rates will remain stable, and that incentives may help keep car prices low in the immediate future."

U.S. treasuries remain strong as stock market investors scramble to put money in safer investments, she said. Auto lenders also are feeling more confident and aren't likely to pull back credit. But consumer confidence remains key to recovery.

"People have been through so much," said John Sternal, spokesman for LeaseTrader.com, an online marketplace for car leases. Sternal likened it to hurricane season in Florida, where LeaseTrader.com is based. "After a bad season, people say, 'Enough, already. I can't keep putting shutters on my house because I'm just so exhausted.'

"Sure, it's bad," Sternal said of downgrading the country's credit rating. "But we're still the most powerful economy in the world."

Sternal expects the number of auto leases to climb. "Automakers need to move cars regardless of the state of the economy and leasing helps them do that," he said.

Ronald Loshin, Chairman of BLC Associates, an auto leasing and finance consulting firm in Larkspur, Calif., said interest rates on auto loans aren't likely to budge much. "The biggest concern is the falloff in consumer demand," he said. "That would translate into lower rates because there is not enough borrowers' interest."

Traffic at dealerships, meanwhile, remains strong. "They're selling everything they can build," said Adam Davis, Store Manager for Suburban Hyundai in Troy. "We've kind of not been affected by anything." The dealership has only had one person back out of a recent purchase: A retiree changed her mind last week because she was concerned about not receiving Social Security checks during the debt ceiling standoff.

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