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November 16,1973
The auto industry is encountering
more than its share of problems as
it enters the 1974 model year—
witness the rather somber sales
forecasts now being put out by the
usually ebullient industry. Auto
moguls undoubtedly foresaw a
normal cyclical weakness in sales,
since 1974 follows on the heels of
two model years which were not
only record dollar earners, but also
represented the strongest back-toback growth performance of the
past several decades. In addition,
industry expectations probably
included some allowance for the
impact of changing consumer tastes
and newly-mandated safety and
pollution-control regulations. But
now Detroit must also take into
consideration the massive yet
unpredictable Middle East oil
crisis— a crisis which strongly
affects the industry, since motor
vehicles usually account for about
half of the nation's total petroleum
consumption.
Entirely apart from the oil shortage,
Detroit began to have increasing
doubts about the strength of the
boom even in the midst of its
record-breaking 1973 model-year
performance. (The model year is
defined here as the first three
calendar quarters of 1973 plus the
fourth quarter of 1972.) New-car
sales peaked early last spring at a
phenomenal 13-million-unit annual
rate, and have since dropped off to
roughly a 1 0 -million rate in Octo
ber. Despite this more moderate
sales volume, factory output—even
at flat-out production— lagged
behind demand until quite recently,
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when factories began to ease their
production schedules in response
to growing surpluses of large cars.
The boom
Gross auto product increased 16
percent in the 1973 model year to
$49 billion, and accounted for
about 4 percent of the nation's total
output. (Gross auto product
measures the value of domestically
produced cars plus the net value
added by the distribution of new,
used and imported cars.) The
boom this year made substantial
contributions to the health of many
other major industries, since Detroit
normally accounts for about onetenth of the copper, aluminum, and
nickel, one-fifth of the steel, twothirds of the rubber, and threefourths of the plate glass purchased
by the nation's entire manufacturing
sector.
Corporations supported the rise in
gross auto product with expanded
fleet purchases, but the major factor
involved was a 141/2-percent
increase in consumer purchases,
following on the heels of an even
stronger 1 8 1/2 -percent increase in
the 1972 model year. A sharp rise
in consumer disposable income
fueled the auto-buying spree;
income wasn't the whole story,
however, since the even-stronger
sales gain of the '72 model year was
based upon a much smaller in
crease in income. Another under
lying factor was the continued
strength of replacement demand,
with scrappage in the neighborhood
of 8 million units. As for financing,
auto-credit extensions jumped 20
(continued on page 2)
Opinions expressed in this newsletter do not
necessarily reflect the views of the management of the
Federal Reserve Bank of San Francisco, nor of the Board
of Governors of the Federal Reserve System.
percent in both 1972 and 1973, or
several times as much as in any
other year of the past decade.
Sales also benefitted from con
sumers' apparent desire to buy
ahead in anticipation of price
increases. This was especially true
of import sales, which soared last
winter when buyers realized that
prices would be considerably
higher after the February devalua
tion. (This recent episode was
almost a repeat of the sales
performance following the defacto
devaluation of August 1971.) But
higher import prices did little to
stem the import boom, except for
the lowest-priced foreign models.
Indeed, the sales value of foreign
cars (boosted by post-devaluation
prices) rose 21 percent to $9.8
billion— an amount equal to total
import sales during the entire
1960-67 period.
The bust?
Those purchasers who rushed to
beat the crowd last year probably
will not be in the market this
year for a more expensive 1974
model, imported or domestic.
Neither will those who are worried
about the efficiency of new pollu
tion-control equipment, especially
when they are also worried about
the price and availability of gas
supplies. And potential import
buyers might overlook the obvious
fuel economies of those models
when they realize that low-priced
foreign cars are no longer lowpriced. (After its fourth price boost
this year, Volkswagen's Beetle is
now 31 percent more expensive
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than a year ago.) Detroit's fore
casters may well be correct in
estimating a decline from 1973's
almost 12-million-unit pace to a
level of about 11 million units in
the 1974 model year.
A more interesting question is what
will happen in 1975 and later years.
Based on the usual variables of
population, income, and average
age of the auto stock, the indus
try's demand equations suggest a
strong uptrend throughout most of
the decade. Based on a number of
imponderable factors that have
surfaced within the past few years,
they may come up with a somewhat
different conclusion.
Many potential buyers increasingly
view an automobile as simply a
vehicle rather than a status (or sex)
symbol. Younger well-educated
buyers in particular have become
less susceptible to the industry's
traditional sales pitch, designed to
persuade them to trade up to the
limit of their ability. This choice of
practicality over glamour is related
to the demand for second and third
cars, which represent virtually all of
the industry's sales growth because
of the saturation of the one-car
family market. In this second-car
market, small low-priced (and lowprofit) cars are normally all that is
required, which suggests rather
somber implications for the indus
try's dollar value. The household
funds that used to go for the
purchase of big expensive cars may
now be spent for new status
symbols, such as boats or vacation
homes.
Replacement demand will continue
to provide a strong underpinning
to the market, however. With the
number of cars on the road rising
steadily, and with scrappage
chewing up about 9 percent of
those cars every year, the growth
of replacement demand seems
almost assured. (In recent years,
scrappage has amounted to roughly
70 percent of new-car sales.) A
number of individual factors affect
scrappage rates, but perhaps the
most crucial is the age distribution
of the auto stock. By that standard,
the scrappage rate (and replace
ment demand) at mid-decade might
approximate 8.5 million units— one
million units higher than at the
beginning of the decade.
Industry response
Despite the high floor placed under
total demand by this level of
scrappage, Detroit is not overly
optimistic about the 1974 model
year, for all the reasons mentioned
above. To complicate matters, the
industry must face the fact that its
recent record-breaking sales per
formance has not been matched by
a comparable profits performance,
because of such factors as the Cost
of Living Council's skeptical attitude
toward price increases and the
consumer's growing preference for
small, low-profit cars.
Detroit's basic response to these
developments is to meet the
customer at least partway. All pro
ducers have joined in a drive to
beef up capacity for smaller cars, in
the process slowing down produc
tion lines for the gas-guzzling
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0
larger cars. But with an eye on
profits, the industry is loading up
the smaller cars with all the (profit
able) options they can carry. The
Mustang II, newly unveiled as a
cut-down successor to the very
successful Mustang of 1965, carries
a basic sticker price of $2,895, but
fully equipped with options it can
run to more than $4,000.
Paralleling these efforts, the
industry is heightening its costcontrol efforts. It is beginning to
adopt major innovations in tech
nology—the Wankel engine being
the best example— with the double
attraction of reducing both pollu
tion and costs. (Critics argue that
Detroit's last major innovation was
the automatic transmission,
adopted in the late 1930s.) The
Wankel rotary has 40 percent fewer
parts and is only about half the
size of the conventional engine. It
is also the only engine presently
available that can meet future
federal emission standards without
prohibitive cost or special gasolines.
As another concession to cost
control, Detroit is junking longhallowed but now outmoded
modes of operation— in particular,
annual and biennial styling
changes. (The new dies and tooling
associated with an annual model
change used to amount to $1.5
billion annually.) With designs
of many models all but frozen for
perhaps the next five years, we may
soon see how much truth there is
to Detroit's long-standing belief
that frequent styling changes are
essential to the industry's sales
volume and profitability.
W illiam Burke
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BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT
(D ollar amounts in m illions)
Selected Assets and Liabilities
Large Com m ercial Banks
Loans adjusted and investments*
Loans adjusted— total*
Securities loans
Com m ercial and industrial
Real estate
Consum er instalment
U.S. Treasury securities
O ther securities
Deposits (less cash items)— total*
Dem and deposits adjusted
U.S. Governm ent deposits
Tim e deposits— total*
Savings
O ther time I.P.C.
State and political subdivisions
(Large negotiable CD 's)
W eekly Averages
of D a ily Figures
M ember Bank Reserve Position
Excess reserves
Borrowings
Net free (-{-) / Net borrowed (— )
Federal Funds— Seven Large Banks
Interbank Federal funds transactions
Net purchases {- {) / Net sales (— )
Transactions: U.S. securities dealers
Net loans (-I-) / Net borrow ings (— )
Am ount
Outstanding
10/31/73
Change
from
10/24/73
75366
57,840
1,157
19,870
17,788
8,857
5,421
12,105
73,680
22,315
683
49,399
17,485
22,734
5,879
11,182
+
+
+
+
+
+
+
+
+
-
406
405
211
43
59
60
147
148
485
567
47
164
29
118
5
212
W eek ended
10/31/73
Change from
year ago
D o lla r
Percent
+ 9,904
+ 9,442
157
+ 2,522
+ 3,134
+ 1,370
- 527
+ 989
+ 9,236
+ 1,687
84
+ 7,622
- 827
+ 6,078
+ 1,137
+ 5,081
W eek ended
10/24/73
+
+
+
+
+
+
+
+
+
+
+
+
15.13
19.51
11.95
14.54
21.39
18.30
8.86
8.90
14.33
8.18
10.95
18.24
4.52
36.49
23.98
83.28
Com parable
year-ago period
35
90
55
36
189
-1 5 3
-
-3 0 3
-4 1 0
-7 6 7
+ 83
-1 5 4
+ 24
-
-
25
13
38
* Includes items not shown separately.
Inform ation on this and other publications can be obtained by callin g or w riting the
Digitized for F R A S e R istrative Services Departm ent, Federal Reserve Bank of San Francisco, P.O . Box 7702,
http://fraser.stlo§^edr<?rgyisco' Califo rn ia 94120. Phone (415) 397-1137.
Federal Reserve Bank of St. Louis
@FedFRASER