Making Money in Today's Economy

In conversations with manufacturers and dealers, we discuss why the auto industry is struggling. Believe me, everyone has an opinion and most of those opinions sound pretty good. So, I decided to conduct my own study and look at different economic factors to be able to form my own opinion. My disclaimer is that this my opinion, and you have every right to agree or disagree. Either way, I want to hear about it.

The Chain Reaction
• Home Values – The average home price in the U.S. has been dropping since mid-2007. This was the beginning of the real problem because people could no longer live off the equity in their home.
• Consumer Spending – Consumers have consistently spent more and more money since 2003 and have only recently started to modify their lifestyle.
• Foreclosures – The inability of consumers to change fast enough has caused a rash of foreclosures  that will continue to climb and peak in second quarter 2009.
• Banks Are More Careful About Lending – The banking industry has a problem that has put a spotlight on their lending practices and caused problems for auto dealers. With that said, banks make money by lending money. They are just more careful about loaning it now.
• Adjustable Rate Mortgages – In 2007, adjustable rate mortgages (ARMs) started adjusting and causing payments to rise dramatically. This had not been an issue in the past because of rising home values. When the cycle stops, however, refinancing is not possible and consumers were stuck with higher payments, which further increased foreclosures. The end of the peak is near, as 2008 represents the height of subprime ARMs. In 2009, the dollar value of mortgages resetting drops in half, but of that amount subprime and near subprime loans will have dropped by nearly $200 billion.
• Consumer Debt – People owe more money each year. In 2004, the average American owed about $10,000 in debt not including real estate. Today, that figure has climbed to over $16,000 illustrating that consumers are really doing very little to change their spending habits.
• Gas Prices – Gas prices are an obvious concern to the U.S. economy. That’s something that the auto industry should be well aware of, but not because consumers will buy less cars as a result. While gas prices affect what kind of cars consumers buy, there is no apparent relationship between gas prices and total unit car sales. A more relevant point is that increasing gas prices cause consumers to have less disposable income.
• New Car Sales – Car sales have been down since late summer 2007. In 2008, there has been a greater percentage decrease in new car sales causing great concern for manufacturers and dealers alike. Consumers with better credit are simply not buying cars because they are worried about the economy and are keeping their cars longer than usual.
• Unemployment Rate – The unemployment rate in the U.S. had been fairly stable until the beginning of this year. Today, it sits about 1 percent higher than it did just a year ago.

 Vol. 2, Issue 4