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November 30, 1979 Mourningin Motown The tenth largest U.S. industrial corporation will probably lose a billion dollars or more in 1979. The third largest industrial corporation will probably lose a like amount on its domestic operations alone-although luckily, it can balance its books with profitable operations elsewhere. The important point is that these two firms (Chrysler and Ford) are key elements in an industry which has long typified the power and efficiency of the American economy. Their plight suggeststhe need for a searching examination of the industry which directly or indirectly supports about one-sixth of the American workforce, and which sets the tone for American lifestyles as well. Detroit has shown an admirable ability to produce cars and above all to "move the metal." This year, Detroit produced its 300 millionth passenger car, as well as its 75 millionth truck. In the process, it has provided Americans with their most important consumer durable; the $251 billion worth of autos (net of depreciation) which consumers held at year-end 1978 accounted for about 35 percent of their total holdings of durable goods. But as it enters the 1980's, Detroit must decide whether the market is becoming saturated (at least, saturated with American products) -or whether consumers will be willing to buy the much-improved models of the coming decade. (A separate question is how much fuel will be available to propel those models.) Problems: cyclical, secular New-car sales are in the midst of a cyclical downturn, with sales off about 4 percent this year from the year-ago level. Some weakness could be predicted, following as it does the sales upsurge of the 1976-78 period. However, the record is considerably worse when import sales are excluded. Sales of U. S.-produced autos have dropped 9 percent in 1979, to an 8.7-million annual rate forthe first three quarters of the year. At that level, domestic sales are not much higherthan they were a decade ago, whereas import sales (at a 2.3-million rate) have more than doubled over that same time-span (see chart). Moreover, new-car inventories are higher now than at any time since the dismal days of 1974. At a time of year when inventories normally would be at their lowest because of new model introductions and the resulting sales upturn, the domestic industry was burdened by a 65-day supply on November 1, compared with a 48-day stockpi Ie a year earlier. The industry's problems may be more than cyclical, as the record of import penetration suggests. Admittedly, ever since the Duryea brothers founded the industry in 1893, Payingfor today's autos The weakness in the industry'S near-term sales outlook reflects the weakness of the consumer's income situation, as well as the growing demands by other sectors'for the consumer dollar. Total real disposable income in the January-September period was 3.0 percent above the year-ago figure-only about two-thirds the annual gain of the several preceding years-and the average worker's real spendable earnings have actually declined. Moreover, with the sharp rise in prices of more essential items, consumers are hard-pressed to find enough dollars to spend on autos. Compared with a decade ago, for example, auto spending as a share of consumer disposable income has dropped slightly, from 6.0 to 5.9 percent, whereas the housi ng share has risen from 13.8 to 14.7 percent, and the energy share has jumped from 6.3 to 7.8 percent. Auto sales have benefited considerably from heavy infusions of credit during the past several years-auto buyers borrowed $93 billion (annual rate) in the first half of this year, or double the 1974 pace. But the lending pace has alreadyslowed, and with the in coming years; B.2 milliun cars were . scrapped in 1977 alone. Of course, effective demandcould weaken if drivers postpone junking their older cars, as has throughout the 1 970's-the proportion of older cars (six years or older) has jumped from 39 to 47 percent of the total between 1970 and 1978. recent tightening of credit, the industry can't count on further sales boosts through easy credit. Certainly there seems to be little room for further lengthening of maturities on auto loans. In 1974, finance companies wrote contracts with maturities of over three years for only 9 percent of their new-car loans, and for practically none of their used-car loans; in 1978, they offered lengthy maturities for 57 percent of their new-car loans and even for 22 percent of their used-car loans. The sharply rising cost of owning and . operating a car might help account for this growing tendency by drivers to postpone new pu rchases. Accord i ng to a recent study by the Hertz car-rental firm, ownership and operating costs rose from 33 to 38 cents a mile over the past year-and altogether, jumped 88 percent between 1 and 1979, compared with a 63-percent rise In the overall consumer price index over that period. Indeed, motorists now pay more to run a subcompact car than they paid to operate a full-sized luxury model in 1973. Enoughautos? Assuming reasonable fuel availability, we can expect that Americans will continue to rely heavily on the private auto for transportation. About 85 percent of all Americans now ride to work in their own autos or in carpools. And they use cars, trucks or ta")<isfor about 91 percent of all Working, shopping or recreational trips. Still, they appear to have enough vehicles to handle their needs. About 84 percent of all households own at least one car - the proportion rises to 96 percent for those with over $1 2,000 income-and 36 percent of all households own two or more cars. Tomoll'lI'ow' S autos Detroit of course has been working strenuously to reduce ownership costs through increased attentjon to fuel efficiency, reflecting industry (and Congressional) fears about the availability as well as the price of Middle Eastern oil. The industry obtained its mandate from the Energy Policy and Conservation Act of 1975, which calls for a rise in fleet-average fuel economy to 27.5 miles per gallon for the 1985 model year. That 1 13-percent projected rise in fuel economy over the 1 974 performance has already resulted in dramatic product changes. The new generations of "downsized" vehicles are as much as 1,000 pounds lighter than their predecessors, and of them feature thriftier powerplants, lighter materials, and electronic engine controls. By 1 985, the average car cou Id be 25-P?rc?nt lighter than its current counterpart, weighing in at only about 3,000 pounds, and it could incorporate 50 percent more aluminum and plastic than today's model. Under these conditions of relative saturation, further sales growth depends on the growth in the number of younger drivers-and on the growth in the number of aged cars, i.e., those ready for the scrap heap. Probably not much can be expected from the demographic front. The increase in the number of individuals in the 20-34 age bracket will be only about 2 million during the 1980's, compared with a gain of almost 15 million in the 1970's. On the other hand, replacement demand can be expected to provide strong support for the industry During the 1970's, the industry has made substantial advances in meeting Congres2 MIllions 10 NEW CA R SALES 8 ,/,./'" ,/ /---j /',. 6 , Domestic ./ 4 2 1960 1965 1970 1975 1979 grovvth(21 million) in new-car SniPsin the sionally imposed fuel-economy standards, along with safety and anti-pollution standards. The fuel economy of passengercarfleets has already surpassed the industry's original goal of a 40-percent improvement over 1 974-fleet standards. Traffic fatalities per 1 00 million vehicle miles have continued their historical downtrend, declining from 5.40 deaths in 1 968 to 3.41 in 1978. And today's cars emit 86 percent fewer hydrocarbon emissions, 82 percent less carbon monoxide, and 51 percent less nitrogen oxide, than the uncontrolled 1 967 models. U.S. market. Detroit's fate, in the final analysis, may be settled as much by foreign producers as by American consumers. Most of the world auto industry is beset by overcapacity, and is intensely protectionist at home and intensely competitive overseas. Most producers are heavily reliant on export sales, especially salesto the American market -the japanese industry being a case in point. Despite a sharp rise in the value of the yen, Japan in recent years has increased its share, from one-third to two-thirds, of the U.S. import market. This year alone, about 40 percent of all japanese-produced cars wi II be sold to American buyers. Yet meeting the even more stringent standards ofthe 1980's will require, by the industry's calculations, the greatest retooling of a single industry ever undertaken in the nation's peacetime history. The required investment will reach $70 to $80 billion over the 1978-85 period-twice the bill for putting a man on the moon, as industry spokesmen frequently remind Congressional listeners. Chrysler, for one, has found it impossible to finance its investment needs internally-hence its request for a $1 .5-billion government-loan guaranteeand the industry generally will have to pass these unprecedented costs along to the consumer in the form of much higher sticker prices in the early 1980's. Detroit's response involves not only building "import fighters" with fuel economy and other "import" characteristics, but also expanding the American presence overseas, most notably through the development of "world" cars. General Motors' new T -car for example, may be built in millions around the world-at Opel in West Germany, at Vauxhall in Britain, at a new plant in Spain or France, at Isuzu in japan, at Holden in Australia, at other plants in Brazil and South Africa, and of course at Chevrolet in this country. Thus, if Detroit is unable to "move the metal" as it once could in the domestic market, it can at least uti Iize its world-famed mass-production techniques on a worldwide scale-thereby achieving the necessary economies of scale while maintaining a sales presence in every possible market. ' Tomorrow's market The problem wou Id be eased if Detroit cou Id take advantage of efficiencies of scale, with lengthy production lines for their 1 980-85 models. But increased sales may not come easily. Faced with higher auto prices, consumers may hold on to their older (and roomier) cars for longer periods of time, as they have been doing recently-or faced with long lines at the gas pump, they may even become desperate enough to take the bus. But again, if consumers do decide to buy, they might choose the similar appearing but frequently more reliable import model over the Detroit version. The trend of course is already evident; between the 1 960's and the 1970's, imports accounted for more than half of the entire William Burke 3 " uo8aJO" epellaN o4epi e!uJoJ!le:::>" euoz!N CII e>lselV III !WMeH (G) 'o:)sPUl!J:I Ul!S (;SL ' ON al Vd :J9V 150d 's'n :u. llVW 55V1 J 1SlI1:1 BANKING DATA-TWELfTH flEDERAlRESERVE DISTRICT (Dollaramountsin millions) SelectedAssetsand liabilities large CommercialBanks I) Amount Outstanding 11/14/79 135,057 112,024 31,080 42,196 23,876 1,589 7,421 15,612 45,903 32,157 28,893 57,539 49,179 21,465 Weekended 1/14/79 Change Changefrom yearago@ from Dollar Percent 11/7/79 + 16,261 + 121 + 13.7 + 15,977 + 104 + 16.6 - 199 + 2,924 + 10.4 + 217 + 8,765 + 26.2 NA NA + 54 NA NA + 55 969 15.0 + 37 20 + 8.7 + 1,253 +1,614 + 2,750 + 6.4 + 296 + 1,287 + 4.2 1,488 223 4.9 + 851 + 18.6 -+ 9,006 + 837 + 9,942 + 25.3 + 12.8 + 610 + 2,432 Weekended Comparable year-agoperiod 11/7/79 Loans(gross,adjusted)and investments* Loans(gross,adjusted)- total# Commercialand industrial Realestate Loansto individuals Securitiesloans U.s. Treasurysecurities* Othersecurities* Demanddeposits total# Demanddeposits- adjusted Savingsdeposits- total Timedeposits total# Individuals,part.& corp. (LargenegotiableCD's) WeeldyAverages of Daily Figures MemberBankReservePosition ExcessReserves (+ )/Deficiency(-) 1 + 175 + 37 + Borrowings 276 + 201 + 17 Net freereserves (+ )/Net borrowed(- ) 26 239 16 federal Funds- SevenLargeBanks Net interbanktransactions 389 + 584 + 1,156 [Purchases (+ )/Sales(-)] Net, U.s. Securitiesdealertransactions + 222 + 343 + 208 [Loans(+ (-)J * Excludestradingaccountsecurities. # Includesitemsnotshownseparately. @ Historicaldataare not strictly comparabledueto changesin the reportingpanel;however,adjustments havebeenappliedto 1978datato removeasmuchaspossiblethe effectsof the changesin coverage.In addition,for someitems,historicaldataarenot availabledueto definitionalchanges. Editorialcommentsmaybe addressed to theeditor (William Burke)or to the author.... 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