Automotive Sales Down and the Prospect of a Recession

Prof. Hamilton notes that car sales are way down for the most part. GM’s North American division has lost $1.2 billion in the second quarter, Ford has seen sales decline 20% with sales of SUVs down 50%.

Now that is bad for GM, Ford and other automotive companies, but Prof. Hamilton also notes that bicycle sales are going way up, and that what this means is that it is another inidicator of a possible recession.

But as I’ve emphasized many times, when such changes occur this suddenly, a drop in car sales and rise in bike sales do not add up to an economic wash. Because productive resources cannot quickly move from one sector to the other, the idled factors formerly devoted to automobile production will magnify the initial shock and can lead the economy into a recession

So, we have high oil/gasoline prices, the hurricanes, the sagging consumer confidence and now sharply declining car sales. And on top of this there seems to be no sign of the Fed slowing its rate of increase for interest rates. I’m thinking that a recession cannot be far off with a situation like this. Oh, and probably just in time for the 2006 elections.

Update: One problem with decision making is that people sometimes become too focused on the bad news. Here is some good news, factor orders rose 2.5% in August. Also there is this article on the declinging crude and gasoline future prices as demand falls.

Oct. 4 (Bloomberg) — Crude oil and gasoline plunged on signs that record prices are curtailing fuel demand as refiners repair units damaged by Hurricanes Katrina and Rita.

“We are starting to see a change in consumer behavior,” said Michael Fitzpatrick, vice president of energy risk management with Fimat USA in New York. “Consumers are cutting back because of high prices, rising interest rates and signs that the housing bubble is ending. Prices have probably begun the long steady process of grinding lower.”

Also, eight of the nine refineries in the Houston area are resuming operations, and the demand for gasoline has declined by an amount even larger than is normal for this time of the year. And heating oil futures even declined, but are still 45% higher than last year.

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Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Herb says:

    Just as I predicted.

    The American prople will not stand High Gasoline Prices for very long.

    After the economy falls, The politican will be next.

  2. ICallMasICM says:

    Maybe they should lower the prices? Maybe since my wife’s POS Jeep went thru 3 transmissions and 1 batterry in the first 22,000 we’re not rushing out to drop $35K on a new one?

  3. Herb says:

    Thats what ou get when you buy a Chrysler product

  4. ICallMasICM says:

    Like Ford or GM is better?

  5. McGehee says:

    I don’t think high gasoline prices are causing sales to go down, Herb. If anything, these prices have got my wife thinking about buying a car that gets better mileage than what she’s driving now.

    The effect of gasoline prices on the economy is more long-term than that. People can only cut back so much on their driving, so they have to cut back on their other expenditures to make room in their budgets.

    As for declining car sales, the price games and poor quality to which ICM refers, are far more relevant.

  6. Herb says:

    NcGehee:

    You have stated precisely what I have said.

    “people can only cut back so much on their driving, so they have to cut back on other expenditures to make room in their budgets”

    Those cutbacks will come from the usual expenditures in the holiday season. as well as other frills they spend for.

    Remember, there are a very large number of merchants that depend on a good holiday season to make or break their yearly profit picture.

    The money NOT spent on the holiday season will be spent on gasoline, heating oil and natural gas for the coming winter season.

    It remains true today as well as years past,

    “the American have a love for their cars”.
    They will cut every possible financial corner to put gasoline in their cars.