Pierced but not battered by bullish 1995 forecasts that failed to materialize, the U.S. Big Three automakers' chief economists remain upbeat about the outlook for 1996.
All of the ingredients for the new year to be as good or even better than 1995 are apparent to the "oracles" who tell the chief executives ofCorp., Motor Co. and Corp. their tales of tomorrow.
But what happened in 1995?'s prediction of 16.5 million vehicle sales led the pack. Although that lofty forecast was made by his predecessor, W. Van Bussmann, the new corporate economist for the No. 3 automaker, blames the Federal Reserve Bank's interest rate increases and hard line on seeking a "soft landing" as the major marketplace snag. "We are probably going to see (final) numbers for 1995 around 15 million, depending on fourth-quarter activity," he reckons.
G. Mustafa Mohatarem, GM's new chief economist, says GM eyeballed 15.5 million sales for '95 when the year began but around 15.1 million when it ended. "The Feds succeeded in bringing about a soft landing," he says. "They may celebrate that. We didn't. It didn't make us happy. The slowdown, especially in the second quarter, was sharper than even the Fed expected."
was just a step behind Chrysler in expecting 16.3 million sales in 1995. Martin B. Zimmerman, executive director of government relations and corporate economics, credits the Fed with keeping inflation "really well behaved. To me the most remarkable thing about this economic recovery (nearing its fifth year) is that" inflation was held to less than 3% this year. Mr. Zimmerman expects the inflation rate to remain about the same in 1996.
None of the trio sees the economy slipping downhill. "The normal pattern of a recovery dying is when inflation and interest rates rise, and then something tips the recovery over," Mr. Zimmerman theorizes. "Last time was the Persian Gulf, and before that the oil shock (of the 1970s)."
GM's economist notes that this recovery is different from all other comebacks since the end of World War II. "Normally, the government cuts taxes or increases spending to motivate a recovery," Mr. Mohatarem comments. "This time, we have seen the reverse, with an increase in taxes, a reduction in government spending, plus a massive defense cutback.
"There are two implications in this reverse action. The recovery has been much slower than a traditional upturn, but we have a full employment level. The $100 million question is: because we did not artificially stimulate the economy and it has grown on a slow but steady path toward full employment, can that path be sustained longer?" he asks.
Mr. Zimmerman predicts the Fed will leave interest rates alone for awhile. GM's Mr. Mohatarem suspects that if interest rates move in any direction, it will be downward. He sees rates going lower in a Presidential election year, especially if the economy shows signs of weakening. Chrysler's Mr. Bussmann concurs, and believes the rate could be cut a quarter of a percentage point because the financial markets are signalling that a slight decline would not be inflationary.
All three see the recent wave of firings and layoffs in the middle-management ranks at major corporations as devastating to individuals but hardly causing any turmoil in the economy. "The bottom line is that on net the economy has added 200,000-plus jobs for the last 18 months," says Mr. Mohatarem. "Third-quarter Gross Domestic Product (GDP) numbers surged 4.2%, so the economy is doing very well in two respects: The rate of growth is good, and there are no significant imbalances. Inventories, including motor vehicles, generally are under control."
Mr. Bussmann notes that personal per-capita income has risen dramatically during this recovery period. Ford's Mr. Zimmerman concedes that layoffs are not good for car sales, but he observes that new firms are starting up and some are restructuring. He estimates disposable personal income has risen 3.5% in the last 12 months.
There have been questions about the auto industry's ability to keep used car inventories under control following the recent public trend toward leasing. One economist says leasing is simply another way of getting cars into the hands of customers -- just like a cash sale or five-year financing, and thus there should be no change in the total new-vehicle sales.
Leasing appears popular because of a convenience factor that allows an owner to get out of a deal in two or three years. It also benefits the manufacturer because the lease buyer has to return to the dealership when the contract ends. Ford's Mr. Zimmerman recalls that in 1986 the industry sold 16.3 million vehicles, with most of those still on the road in 1988, a record high. "The market absorbed those cars and did not change the fundmental balance of supply and demand," he reminds.
Adding to their modest optimism for 1996 is the outlook for global markets, especially Asia-Pacific. With GM just concluding a billion-dollar deal to build 100,000 midsize Buick Regals per year in China, Mr. Mohatarem is understandably excited about prospects there. "China's economy has been growing at a rate of 10% per year for much of the last decade," he says. Even though the base is low, at that rate it will double in seven years. "Compare that 10% growth with the U.S. rate of 2.5%, which is considered good," he underscores.
The GM economist sees the Chinese government liberalizing the economy and bringing actual vehicle sales numbers closer to predictions. He says that the best action China's leaders could take would be a policy of non-action. "There are people in China who are getting very rich," he says. "The big industry today is all kinds of light manufacturing and its market is the entire world." He estimates that if China's economy maintains its current growth rate, it will surpass Japan during the middle of the next decade, a forecast supported by the World Bank.
The Japanese market also appears to be on the verge of a mild breakthrough. Mr. Zimmerman says Ford is committed to increasing its sales if the Japanese abide by the recent trade agreement to open up distribution channels. "I see no reason why the Japanese would not go along with the agreement, and Ford has some aggressive plans to expand sales, given our products in price and value," he says. Ford will soon start exporting four righthand-drive models to Japan from the U.S.
Mr. Mohatarem observes a marked change in the Japanese market in the last three years. "Even though the market there has been weak, imports from all over the world, including America, have performed very strongly. Just like anyplace else, when incomes rise, people demand variety; both the quality and the price of imports into Japan have become very competitive with products from their homeland." GM will start shipping Cavaliers to Japan for distribution byMotor Corp. starting this month.
The dollar-yen relationship, now at around 100, will continue to be a factor this year. Chrysler's Mr. Van Bussman expects the dollar to appreciate against the yen over the next year and a half. Ford's Mr. Zimmerman sees the yen staying around 100 for awhile, but expects it to rise in value over the long term. He adds: "Currency forecasting is dangerous to one's health."
Back across the ocean, the Mexican economy remains in deep distress. Is the North American Free Trade Agreement (NAFTA) to blame? The economists contend the Mexican economy would have sunk even lower without it.
Observes Mr. Zimmerman: "The peso crisis threw Mexico for a loop, and the country, including the auto industry, is going through a recession. Blaming the problem on NAFTA is a non sequitur. NAFTA makes it easier for Mexico to end the recession because in the past it might have favored protectionist policies to deal with balance of payment and other problems. NAFTA precludes that, and will make Mexico's emergence from the recession easier and more robust. Long-term prospects are good, and I would not be surprised to see them beginning to emerge in the next year."
Chrysler's Mr. Bussmann says Mexico's problems stem from allowing the peso to become overvalued and failure to attract direct investment as opposed to heavier portfolio investment. Despite Mexico's slump, American automakers are exporting more vehicles there and Mexico is sending more vehicles into the U.S. under NAFTA, he says.
Mexico's problems have drifted into Latin and South America with adverse effects, especially in Argentina and Brazil. Mr. Mohatarem calls the Mexican influence the "tequila effect," with the flow of "foreign capital slowing into the region." He rates the impact as far more severe in Argentina than Brazil. "It seems like every month a new foreign auto company announces plans to build in Brazil. In Argentina, the currency-reform program imposes a lot of restraints, which makes the short-term outlook less attractive than the long-term." Brazil also is a much larger economy with a more competitive manufacturing base, especially in the auto sector, he points out.
Ford's Mr. Zimmerman believes both South American nations are going through a a tough period but should stick with economic reforms, boding well for the long term.
With a solid base for growth at home and brighter prospects around most of the globe, when will the proverbial "inevitable downturn" occur? Here's how the economists respond:
Mr. Bussmann: "There is no sign of an `inevitable downturn' in 1996. I don't think current conditions warrant that at all."
Mr. Mohatarem: "We always have cycles in the economy. From a long-term perspective, there will be another downturn."
Mr. Zimmerman: "People talk about it like the sun is going to come out every morning, and sooner or later we are going to have a downturn. Right now, inflation is low. The birth rate is at a sustainable rate, rising after being lower. There is nothing in the system that will drive a recession -- no recession in the foreseeable future."
On the theory that all good things must come to an end, however, many economists look for the next automotive down-cycle to start sometime in in the 1997-