["The crunch for the economy is likely to come next month, when the existing incentives expire."]
Financial Times, Aug 17, 2002
BACK PAGE - FIRST SECTION
America relies on carmakers to steer it from road to recession
By Jeremy Grant and Peronet Despeignes
Barely a week after the September 11 terrorist attacks, a delegation of top policymakers from Washington flew to Detroit, the world's automotive capital.
Their mission: to see what America's Big Three carmakers - General Motors, Ford and Daimler Chrysler - could do to keep the wheels of the US economy moving. GM responded with a sales drive called "Keep America Rolling".
The scheme, quickly mimicked by GM's rivals, used interest-free loans and generous "cashback" offers. The idea was, according to one auto executive, to "get people off their couches watching CNN and get on with life".
Ford, for example, is offering with its Lincoln Continental saloon - base price $38,955 (ý24,812) - a $7,000 cashback. "We have the potential to continue doing this for as long as anybody," says George Pipas, a Ford spokesman.
Few would have guessed that almost a year later, Detroit's role as a patriotic cheerleader would have been transformed into helping prop up the US economy.
"They [the carmakers] are bank-rolling this very tenuous, fragile recovery," says Sean McAlinden, chief economist at the Center for Economic Research in Michigan.
Official figures released this week have all but suggested that the US economy in recent months has been hanging by the twin threads of home buying and zero per cent financing from carmakers.
The commerce department said on Tuesday that consumer spending rose by 1.2 per cent, largely driven by a surge in car sales on zero per cent financing schemes. Excluding cars sales, consumer spending rose by 0.2 per cent.
On Thursday, the Federal Reserve said US industrial production grew by 0.2 per cent in July, but this was largely due to the effect of "zero per cent" vehicle financing schemes that lifted vehicle production.
The housing market has been buoyed by mortgage refinancings as homeowners take advantage of low mortgage rates. Americans on average own 1.2 vehicles per person compared with only 0.6 per person in Europe.
The fact that retail sales and output outside the vehicle sector have been stagnant does not trouble some economists. William Cheney, an economist with John Hancock Financial Services, predicts that as long as employment does not shrink significantly, "people will go on spending, but there isn't much pent-up demand to fuel a burst of growth".
But, with the US car industry accounting for about 4 per cent of US gross domestic product, how long can Detroit keep incentives going?
Detroit's continued use of them has in truth more to do with preserving market share than gestures of patriotism.
US carmakers are trying to catch up with Japanese rivals on quality but the Big Three are also fighting each other in an industry mired in over- capacity.
GM, which is offering five-year, interest-free loans on 11 of its models, spent much of the past decade building leaner manufacturing processes.
Bob Lutz, vice-chairman, said the company was generating cashflow "substantially in excess of what our budget assumptions were at the start of the year". Ford insists that, with $25bn in cash at its disposal, it can match any GM scheme.
The crunch for the wider economy is likely to come next month, when existing incentive deals expire.
There are other concerns. Some economists believe the deals have not only created diminishing returns for the carmakers but have also set the stage for a weakness in the coming months.
The biggest unknown, says Paul Bellew, a GM spokesman, is the broader economic backdrop. He says sales of GM vehicles to retail consumers are likely to be up by 1-2 per cent compared with last year.
"The problem we would have right now is if we saw further deterioration in the economy," says Mr Bellew. "Then all of our actions become pushing on a string."