Death of the Great Recovery Part 2: The Second Coming of Carmageddon

Monday, May 7, 2018
By Paul Martin

By David Haggith
May 5, 2018

Like the disintegration of the formerly charmed stock market, the return of Carmageddon is right on schedule. I had stated early last year that one of the first cracks in our economy to become evident would be the crash of the car industry.

That crack materialized as promised, but then Hurricanes Harvey and Irma showed up to flood a million automobiles. Before any statistics materialized to show the economic impacts of those storms, I wrote the following revision for the dates of Carmageddon:

“There is nothing like a wartime economy to bring recovery from economic recession…. Wars (and hurricanes) create a flurry of economic activity, which may juice the economy … but you eventually have to pay for all of that so it doesn’t build wealth for a nation overall…. After Harvey, some articles I read stated that the auto industry, which was already starting down a major decline, would be harmed further. I thought that was ridiculous and that just the opposite is likely to be true. Sure, dealers are out of business for a few weeks as clean-up begins and until inventory gets replaced, so they are experiencing short-term losses right now; but most of their inventory was insured and will be replaced…. In a month or two, their businesses will boom as individuals who lost hundreds of thousands of cars seek to replace them. I am certain we will find that Harvey (and now Irma) actually did the declining auto industry a huge favor. By wiping out a million automobiles, these storms insure that a million more automobiles will be manufactured and sold. (“Hurricanes Harvey and Irma May Lend Helping Hand to Economy“)

And that’s what happened. The downhill auto market shot back up for a few months, causing those who think in shallow terms to proclaim, “Oh, the auto market has been saved!” But I didn’t. While things were picking up in auto sales and looking better, I wrote …

“It was hurricanes to the rescue this year however, as Harvey and Irma wiped out something like a million automobiles. Those will for the most part be quickly replaced, effectively shifting the auto manufacturers’ problems for this year over to the insurance companies…. The hurricanes will not, however, solve any of the auto manufacturers’ troubles for next year. In fact, they likely make next year worse by moving purchases up. (“I Know What the Economy Did Last Summer Part 1 : Carmageddon and the Retail Apocalypse“)

And now here we are. Even though the auto industry got temporarily bailed out in 2017 by the collision of natural forces like hurricanes and wildfires, 2017 still ended as the first year of declining US auto sales since the Great Recession. My timeline for the fall of stocks and the resumption economic wreckage in the auto market was the start of this year. Now that first-quarter results are in, they show that is exactly what happened.

Ford’s new focus

While Ford Motor Company reported frontline news last week that earnings were up in the first quarter, that was entirely due to the tax savings it realized under the Trump Tax Plan. Earnings before interest and taxes were sharply down. In other words, Ford was saved from their poor performance by the new tax law, not by any expansion of its business.

And, as I said would be the case with those tax savings, none of it is going into capital improvements. Ford announced it is actually cutting its capital spending plans over the next few years by $5 billion. In typical euphemistic corporate style, Ford refers to these cuts as “efficiency gains.”

Whether the cuts are due to efficiency or not, one thing is clear: the tax savings are not going to capital improvements. Ford says the “efficient gains” will be attained by “moving capital” from areas of business that are declining toward more production in areas that are doing well. A little deeper in the report, we read their concession on how severe this retreat from failing areas of business really is (though, of course, they try to sprinkle it all with sugar):

Given declining consumer demand and product profitability, the company will not invest in next generations of traditional Ford sedans for North America. Over the next few years, the Ford car portfolio in North America will transition to two vehicles – the best-selling Mustang and the all-new Focus Active crossover coming out next year.

The Rest…HERE

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