The U.S. Auto Industry in 2012

Wonderland or wasteland? Detroit could thrive on U.S. drivers replacing their aging cars—but they'll need to hurry up

By Ed Wallace

"When do you think the economy is really going to recover?" The question that one of the local weekend news anchors in Dallas-Fort Worth had asked me was simple. But I couldn't answer the question, because the answer is actually in his hands.

Instead I asked whether he, like millions of Americans, had locked up his discretionary spending when the world's financial meltdown became impossible to ignore last September. He had, he conceded. And when I asked how his colleagues saw this economic downturn, each from his or her own personal perspective, he agreed that it appeared that they had also pulled back on their personal spending.

"So," I summed up, "you don't believe the happy economic stories you're reporting either."

Thrice Burned…

This past February I reported in a BusinessWeek column that the biggest threat to the recovery of our economy was going to be the baby boomers' severely reduced spending habits. The boomers obviously had slashed their spending to the bone in response to the past few years' repeated disasters on (and by) Wall Street. Even now, though some stabilization is in sight (and I suspect that retail is slowing improving), hard data from the real world suggests that our consumer economy might be months from bottoming out.

Demand for high-ticket consumer services, hard goods, and imports are still all but moribund. Recently American Airlines (AMR) and Delta (DAL) both confirmed they will cut their capacity still further, while Southwest (LUV) reported that its flight bookings for June were even lower than May's. U.S. Airways claims that its revenue streams today are lower than in the period after 9/11. And British Airways (BAY.L) has asked 40,000 employees to work for one month without pay in order to lighten its financial statements' red ink.

Add to the mix the fact that U.S. rail loadings for both April and May were down nearly 25%, 16,000 more trucking jobs went away in April, and container dockings at Long Beach and the Port of Los Angeles have been down over 20%. All this seems to suggest that things are not quite as hopeful as they're being characterized. At best, the promise of pent-up retail demand improving in the near term—which is what it will take for long-term economic growth to start up again—is no easier to see.

Instead of asking any economist where the economy is going, it might be wiser to ask the 16,000 newly unemployed truck drivers.

That Payroll Problem

What may be the most insidious part of this current downturn is that many organizations are not just downsizing their workforces, they're cutting wages for those individuals lucky enough to be kept on. Many such firms were purchased in leveraged buyouts over the past decade, and they owe so much that they can't both service their loans and keep paying the same wages. Therefore, the current unemployment figures don't tell the entire story on where Americans really stand today financially.

Many of those who will continue to be shown as gainfully employed will be forced to cut back on their spending even more to offset their newly lowered incomes. Moreover, once this event passes, it is highly unlikely that those lost incomes will be fully restored. More likely, rehired workers' pay in the future will be in line with the recently reduced wages of their co-workers.

This is not unusual for a period of major deleveraging, whether for the debt-covered homes that were overpriced and over-mortgaged or for corporations that mirror that description. Washington had a choice: Either allow all loans that aren't viable under current economic conditions to be written down to manageable levels, or allow workers and wages to be cut to free up enough cash to make those loans perform. It should be obvious to most by now which strategy Washington chose.

Beacon Score: 500

The other big factor that doesn't favor a substantial resumption of car sales anytime soon is that millions of Americans have lost their credit standing in the massive wave of foreclosures and defaults on credit cards and auto loans. It takes up to seven years after a default to rebuild one's credit score enough to reenter the new car market. This is where speculation arises concerning the future of the American automobile industry.

Given that the nation's economic success has long been built on Americans' personal and business mobility, the positive news is that there are nearly 250 million cars, trucks, and SUVs on the road in this country. Those 250 million vehicles can't be driven forever; at our current rate of annualized automobile sales it would take a quarter of a century to replace the nation's entire automotive fleet. As a comparison, in 1933, in the depths of the Great Depression, the turnover sales rate of our auto fleet was just 14.3 years.

Business Exchange

Track and share business topics across the Web.