Detroit Hopes for Friendlier White House

A group of seemingly disparate headlines will hit the tape Friday morning, when GM ( GM) and Ford ( F) are expected to weigh in with dismal earnings reports, and the Bureau of Labor Statistics releases what will likely be a sharp jump in new monthly jobless figures.

For president-elect Barack Obama, those headlines are likely to color some of the first actions he takes when he moves into the White House.

It's hard to overstate the importance of Detroit when looking at any efforts to keep the economy from falling into an especially steep recession. Hundreds of thousands of workers are employed by the automakers, their parts suppliers, auto dealers and all the secondary businesses that serve the employees of these firms.

On the surface, the U.S. auto industry's problems appear to be a function of very weak demand for cars and trucks. High gas prices forced consumers out of the showroom, which means that Detroit will likely report its worst sales levels in nearly 20 years.

But in reality, the auto sector has very different problems, one of which can be partially remedied by more vigorous federal support -- access to funds to make car loans. Simply put, the automakers' financing arms have run low on funds, and the loans that they have made are increasingly turning sour. Distressed consumers fell behind on their mortgage payments and are now falling behind on their car payments, as well.

GMAC, which provides funds for auto leases and loans (along with some mortgages) just announced a $2.5 billion quarterly loss. That's more than 50% higher than the year-ago loss.

You may hear a lot about enticing loan and lease rates in commercials, but only consumers with the strongest credit scores are actually qualifying for the sweet deals. The rest of the foot traffic in showrooms, depressed as it is, is walking away without new car keys in hand.

That's where the new president and Congress come in. Plans are afoot to buy up troubled auto loans and also allow the beleaguered automakers to tap funds made available to struggling banks. That could help dealers start moving the metal again.

Although current forecasts call for another brutal year for Detroit in 2009, the industry might actually be facing a slightly more bullish outlook, provided it has the cash to lend. That's because several industry headwinds are starting to become tailwinds:

  • Gasoline pump prices have fallen 35% since peaking early this summer, and with oil at $65 (at the time of this writing), pump prices could fall another 10% to 15% this winter.
  • The average age of the country's fleet of cars and trucks had been quite young, thanks to the above-average sales pace seen in 2005 and 2006. But since then, the fleet has steadily aged, and a large number of vehicles, especially pick-up trucks used in heavy-duty environments, are moving closer to the end of their useful range.
  • The automakers have been working feverishly to roll out freshly designed fuel-efficient vehicles, a number of which are expected to hit the market in 2009.

On the campaign trail, Obama called for massive funding to help Detroit modernize its plants and more quickly develop extremely fuel-friendly cars. That plan has several holes in it. For starters, it's hard to make case for supporting Ford , GM and privately held Chrysler and not helping foreign brands such as Honda ( HMC) and Toyota ( TM) when the lines between domestic and foreign have completely blurred.

Every one of these firms have manufacturing operations and shareholder bases throughout the world. At this point, we don't want Japanese, Korean or German governments to think about funding R&D for their major companies.

More importantly, Obama's R&D pledge would be of little help in 2009. And right now, the automakers are a lot more concerned about survival than long-term engineering competitiveness.

If you are looking for near-term clues about how the administration plans to help Detroit in January, keep a close eye on the imminent slate of cabinet position appointments. The choices for the Treasury Department and the Energy Department in particular might hold clues as to previous stances with regard to federal support for the auto industry.

Washington may look to act even before the new president is sworn in. House Speaker Nancy Pelosi (D., Calif.) is said to be drumming up support for an additional $25 billion in low-cost loans for the automakers, though resistance remains high to use those funds to facilitate a proposed merger between GM and Chrysler.

(Reports now say that Pelosi will meet Thursday with the chiefs of GM, Ford and Chrysler to discuss the potential for financial support from the government.)

The Bush administration, for its part, recently confirmed that the $700 billion bailout package can also be used to inject fresh capital into the automaker's lending arms.

After reading through the expected troubling earnings reports from GM, Ford and the labor market on Friday, Congress may feel compelled to have an action plan together as soon as later this month.

More from Stocks

Pegasystems Founder Explains Why He Has One of the Hottest Tech Stocks Around

Pegasystems Founder Explains Why He Has One of the Hottest Tech Stocks Around

9 Stocks Goldman Sachs Thinks Will Blow Wall Street's Performance Away in 2019

9 Stocks Goldman Sachs Thinks Will Blow Wall Street's Performance Away in 2019

Jim Cramer on U.S.-China Trade: The Media Has it Wrong

Jim Cramer on U.S.-China Trade: The Media Has it Wrong

Is Tesla's Stock Set to Nearly Double to $500?

Is Tesla's Stock Set to Nearly Double to $500?

Tesla's $78,000 Model 3 Is a Bargain. Here's Why

Tesla's $78,000 Model 3 Is a Bargain. Here's Why