When consumers find their finances crunched, sport-utility vehicles and other luxury cars are among the first items they banish from their budgets.
So in the usually cyclical automotive industry, contingency plans are at the ready. And they're relatively easy to execute, because product cycles are even slower than sales cycles.
But in the industry's current state of explosive growth, analysts and corporate economists have seen their own dour forecasts fizzle so recently and so often that few are willing to predict a downturn.
After six years of strong sales and expansion, "everyone keeps embarrassing themselves by being the first to predict a decline," so those voices seem to have quieted, says Randy Miller, industry analyst for the
Office of Automotive Affairs. The big three U.S. automakers --
-- had murmured about a 2% decline this year, he says, though they now appear on track for 6% growth.
American consumers have kept the auto industry soaring for an unprecedented span of time, buying more than 15 million cars and light trucks a year for the past six years (except in 1995, when they bought 14.7 million).
Still at Record Levels
Source: Commerce Department
"We're having a rip-roaring first half," says George Magliano, director of automotive research for the independent New York research firm
. But "there's always a contingency plan for a recession. It can shift rapidly on a sales level."
Getting Aggressive on Financing
While delaying new products and slowing production can easily be accomplished in time to match slowing demand, automakers have an additional lever on the balance sheet -- the financing side of their business. Manufacturers have been aggressive this year with sales incentives, especially cheap financing.
They will likely take advantage of the
Fed's recent interest-rate hikes with higher rates of their own, and those could be decreased in the event of a slowdown in the business cycle, Magliano says.
"It's one of the more cyclical parts of the economy, so if you're going into a recession or coming out of one, it's likely to be affected more quickly," says George McKittrick, an economist for the Commerce Department's Bureau of Economic Affairs.
History bears that out: U.S. consumers bought 15.5 million vehicles in both 1977 and 1978, but only 13.3 million in 1976 (when a tight federal budget without certain tax cuts sought by President
led to an October spike in unemployment and the subsequent election of
) and 14.2 million in 1979 as interest rates and inflation soared. Similarly, the record average of 15.5 million sold a year for the years 1985 through 1988 was followed by sales of 14.5 million in 1989, after the stock market crashed, and only 13.9 million apiece in 1990 and 1991, when it was the economy, stupid.
Vroom! (Sales.) Sputter! (Stocks.)
The industry's continued prosperity has not sent its stocks soaring, especially not compared with the price-to-earnings multiples of stocks in hotter industries such as high technology and biotechnology.
"Investors haven't believed it since 1994," says Wendy Needham, an analyst at
Donaldson Lufkin & Jenrette
. "Multiples have just gone lower and lower."
Still, rising interest rates should give investors pause, says Needham, who has buy ratings on Ford and GM. A wiser bet, in her view, is the parts suppliers, whose stocks' price-to-earnings multiples have contracted below those of the automakers for the first time ever.
"If we do get a slowdown, theoretically the suppliers will see their margins expand," Needham says. That's because parts makers like
are operating near 100% capacity. A mild slowing of demand could allow them to operate more efficiently, Needham says.