America's Credit Crisis May Prove Last Straw for Auto Buyers

By Michelle Krebs September 22, 2008

By Dale Buss

the credit crunch - sized.JPG The federal government's unprecedented intervention on Wall Street last week may have saved the credit markets from an epochal collapse, but it didn't salvage one of the most important economic activities on Main Street: buying a car.

U.S. auto sales are likely to continue and even intensify their slide in coming weeks as American consumers react to this latest blow to their underlying confidence in the economic future, and as hyper-sensitive credit markets make it more difficult for willing customers to complete a vehicle purchase.

"Volatility creates uncertainty, and uncertainty leads people to question the future," said David Littman, a Michigan-based economist and veteran student of the auto industry, as retired chief economist for Comerica, the former Detroit-based bank-holding company now headquartered in Dallas.

"This uncertainty weighs especially among the more affluent age cohort of boomers who are worried about retirement - and the fact that the ongoing depreciation of their homes isn't going away. Those are the wealth and income factors that affect durable-goods buying decisions.

"People facing what they have in 2008, and a recession in 2009, and the income-tax cuts likely going away - they postpone," Littman added. "The nature of [auto consumers] in this kind of situation is to postpone and make do with what you've got, to repair and replace rather than buy new. That's the adverse impact of what's been happening, and it's likely not over."

Right now, said CEO Jeremy Anwyl, "People don't know what to think and don't fully understand what's going on, even if they pretend to. So, usually, people do nothing - and that represents a pullback."

Squelching Optimism

Such glum analyses in the wake of last week's credit-market blowup have snuffed out what had been a small but growing chorus of sanguine voices who looked at August sales results and concluded that the industry was at or close to some sort of market bottom, based largely on the fact that market fundamentals seemed to have improved from a dismal July.

The direction of consumer confidence "changed in July and August for the first time in a long, long time," said Lincoln Merrihew, senior vice president of TNS Automotive, a division of the Boston-based research firm TNS, that compiles the data for the closely watched consumer-confidence index published by The Conference Board. "It's sort of like just as the first flowers were appearing in the spring, we got a frost."

Now, all bets are off as to how bad the results will be when U.S. automakers report their September sales on October 1. Even before last week's riveting events on Wall Street, "the early indicators were that September sales were softer than either August or July, on a seasonally adjusted basis," Anwyl said.

As the nation's auto dealerships opened their doors on Monday morning, there were no immediate and clear indications of further deterioration in consumer traffic. Similarly, no sudden decline had appeared in shopping activity as expressed in online research on car purchases.

"People haven't drastically cut back this week, and there hasn't appeared any big drop-off in consideration after August," said David Tompkins, executive director of industry solutions for Santa Monica, California-based, on Friday.

Two Worries

Jesse Toprak,'s executive director of industry analysis, said that last week's rescues of huge financial institutions and the roller-coaster ride in stock markets "probably won't change our forecast for the rest of the year," which he predicted as 14.3 million vehicles. His view is that the new-vehicle market "hit bottom in July and [showed] relative improvement in August."

Toprak noted that immediate prospects likely would be much dimmer if stocks hadn't pulled out of their tailspin and reversed direction at the end of last week, as investors worldwide reacted with relief to news that the U.S. government was going to absorb most of the risk from the mountains of bad debt that had accumulated.

"At least it didn't keep going down," he said, "although there is going to be some direct impact on people who are losing their jobs in Manhattan. They won't be buying BMWs with their bonuses in December."

But the consensus of economists and other industry observers is that uncertainties introduced by the credit crisis, and fed by the continuing national election campaign, could produce a traumatic effect on car buyers similar to their discouragement in the wake of the second-quarter run-up in gasoline prices to more than $4 a gallon.

The concerns of experts boiled down to two things: the immediate impact on auto sales of a further tightening of credit, and the somewhat more diffuse blow to consumer confidence from the awful spectacle of a near-meltdown of the global finance system.

Starved for Credit

Representatives of each of the four largest automakers in the U.S. market declined to comment for this story.

But reflecting the last week's seize-up in the free flow of capital in credit markets around the globe, one thing they're surely concerned about is the very direct effect that the credit meltdown will have on the availability of loans and leases to auto consumers. "Our biggest problem isn't gas prices," Chrysler LLC President Jim Press told reporters, even back on September 2. "Our biggest problem is credit."

The tightening definition of credit-worthiness already has dealt a blow to automotive leasing activity over the last several weeks, creating an additional hurdle - on top of high gasoline prices - for OEMs ranging from the domestic Big Three to luxury brands such as BMW and Audi.

The automakers' captive finance companies have been pulling back on leases as their own credit facilities have deteriorated. And now, banks and other institutions that have been making car loans and leases are more reticent.

"Credit standards are tightening, and will stay tight for a while until banks and other credit institutions, and finance companies, see the flow of money to them from investors," said Mike Sheridan, president of Global Debt Network Automotive, an Alamo, California-based company that packages and sells dealers' auto loans to financial institutions.

Even if and after Treasury Secretary Henry Paulson's bailout plan is enacted, Sheridan said, "it may take several months before you really begin to see credit availability flow down to auto financing and have an effect on consumers' ability to borrow."

Taking It Personally

In the meantime, industry participants expect continued restrictions in the availability of leases, an option that is important to many auto consumers. Credit availability also is having a direct impact in areas such as the sale of extended warranties, credit insurance and other products guaranteed by companies that now look more and more shaky to consumers.

"If an insurance giant like AIG can suffer the way it has, then consumers are going to get worried about products that are sold to them through dealer F&I departments - which typically aren't backed by some company as large and highly rated as AIG," said Gabriel Galaviz, executive vice president of SouthwestRe, a Dallas-based third-party administrator that provides finance and insurance products to auto dealers.

Second, and perhaps more profound, are the increasing doubts that all the financial volatility is planting in the psyches of American consumers who already were concerned about the overall economy and their long-term financial future.

Sheridan said that consumers are translating "to a personal level a fear of what's going on out there on a national basis. They're asking themselves, 'Do I really want to go make a big-ticket purchase right now?', and that stops them from walking into car dealerships. There's hesitancy on a big-ticket item that is second [in cost] only to their houses, and it's a scary situation given job-security concerns and, especially, if gas prices go any higher."
Crisis of Confidence

The blow to American consumer confidence from last week's events is palpable. The number of Americans with a negative view of the economy rose to 78 percent over a two-day period early last week, up 8 percentage points from the last survey, according to Gallup Organization. It classifies Americans as having a negative outlook if they rate current conditions as "only fair" or "poor" and say the economy is "getting worse" or staying the same.

Littman said that such sentiments are "part of a longer-term lower level of confidence that isn't going to be relieved just by the fact that the stock market recovers from the panic mode it was in, or even when an election is over." And he predicted that "a national recession now is absolutely unavoidable around this time next year."

Toprak agreed. "We probably won't see any kind of relative, measurable recovery in the auto market until late 2009." He added that "consumer confidence is key here. And the only way that we'll see real improvement in consumer confidence is an improvement in the housing market. Once we see some glimmer of stabilization there, we can talk about improvement in other markets."

TNS Automotive's Merrihew said that the mentality of American consumers "seems to be driven 20 percent by the news and 80 percent by their wallets. So until a bank merger of Chapter 11 filing actually impacts enough people, and in ways they can talk about, [the credit crisis] is probably going to have a small impact by itself." CEO Anwyl noted that many of the dynamics underlying the economy's current struggles stem from cycles in the real estate markets that play out over periods of a decade or more. "To some extent, we're seeing a cleansing that the economy goes through regularly," he said.

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