Already reeling from the impact of the previous year’s trouble in the U.S. subprime mortgage market, American consumers were slammed in 2008 by a sharp decline in home values, rising loan defaults and resulting bank failures, the like of which had not been seen in nearly 80 years.

The easy-credit financing of everything from homes to vehicles that had been keeping the economy percolating evaporated virtually overnight.

Special Report

2008 Year in Review

Not helping matters was rampant speculation in crude oil futures that helped push U.S. gasoline prices through the roof for the third consecutive year, this time clearing $5 per gallon for regular in many areas of the country. Normally cheaper than gasoline, diesel fuel – the life blood of the trucking industry – ran as much as $1 more per gallon in most areas. That only added to the economic stress by driving up retail prices for many commodities.

With Americans laying out a more substantial portion of their incomes to feed their families and their fuel-guzzling SUVs and large pickups, spending in other areas suffered.

Hoping to provide an economic lift, Congress enacted “rebates” of up to $600 per adult and $300 per child. Although the government checks bolstered the economy for awhile, by fall most of the money had been spent and the effects were winding down, just in time for a stock market free-fall starting in October.

Even the government’s fourth-quarter $700-billion Troubled Assets Relief Program failed to get bailed-out banks to restore lending that had all but ground to a halt over the summer.

People fearing for the loss of homes and jobs, and unable to get financing, did not buy new cars and trucks. As a result U.S. new light-vehicle deliveries fell 18% to 13.2 million units, a 16-year low, from 16.1 million in 2007. Thus, in just three years the market dropped by 4.2 million units, or 24.1%, and remained well shy of the record 17.8 million sold in 2000.

Unkind as the year was to the industry in general, it was worse for Detroit’s three home-grown auto makers.

Chrysler LLC was hit the hardest, experiencing a 30.3% plunge to 1,447,736 in 2008 from the prior year’s 2,076,062 deliveries. General Motors Corp. posted a 22.7% sales decline for the year, to 2,955,860 from 3,824,550 in 2007, while Ford Motor Co. fared the best of the group with sales falling 20.3% to 1,941,041 from 2,436,530.

Although import brands performed better overall than the domestics, American Honda Motor Co.Inc., with sales down 7.9%, stood alone among top Asian brands in avoiding a double-digit year-over-year decline. Toyota Motor Sales U.S.A. Inc. suffered a 15% setback, while sales at Nissan North America Inc. were down 11.0%.

In the extreme, American Isuzu Motors Inc. called an end to its 27-year independent presence in the U.S., folding operations in December after clearing out the last of its ’08-model badge-engineered variants of Chevrolet/GMC models.

At the same time, more than 1,000 dealers of all makes, unable to obtain financing for either retail buyers or their own inventories, closed up shop, with an even larger number forecast to go bust in 2009.

And what sales were made in 2008 came as the result of costly auto maker-backed finance and incentive programs that left Chrysler and GM on the ropes.

While privately held Chrysler’s parent, Cerberus Capital Management LP, declined to report financials, by late 2008 the auto maker was widely reported to be in a desperate financial situation and Cerberus began casting about for a partner with whom to share the burden.

Eyeing a reported $11 billion cash stash, Cerberus began discussions with GM about a possible merger. But, those talks quickly dissolved as GM’s cash horde dissipated in the face of soaring incentives, rising costs and falling sales. Reacting to the light-truck sales downturn, GM announced the near-term closing of at least two pickup and SUV plants and said more shutdowns were on the horizon. Chrysler pulled the plug on its Chrysler Aspen and Dodge Durango large SUVs after the ’09 model run, along with the Newark, DE, plant that built them.

Both auto makers would have been forced into bankruptcy late in the year had it not been for an emergency loan from the government’s TARP fund. The aim was to keep them alive into 2009 when the new administration of President Barak Obama and a more Democratic Congress came to power.

Ford appeared to be in the best shape of the three domestic producers, having set up additional credit lines prior to the banking meltdown and divested itself of money-draining Jaguar and Land Rover in a sale to India’s Tata Motors Ltd.

In April 2009, while GM was still in the throes of a reorganization to stave off government-supported bankruptcy and Chrysler was trying to finalize a deal with Italy’s Fiat Auto Group to forestall possible liquidation, Ford Chairman Bill Ford, Jr. said his company was unlikely to need any federal aid.

Yet, amid all the doom and gloom, auto makers were still bringing exciting new vehicles to market, including the revival of a couple of storied performance nameplates.

Chrysler led off with the spring 2008 introduction of the ’08-model Dodge Challenger SRT8, a super-high-performance coupe that later spawned a line of V6- and V8-powered ’09 models, all carrying retro styling similar to that of the like-named sporty car launched in model year ’70.

Chevrolet also aimed to take part in the success Ford had generated with its reinvigorated ’06 Mustang, the last original “pony car” nameplate still in continuous production, featuring retro styling cues from the popular ’67-’68 models.

Chevy revived the dormant Camaro badge and attached it to an all-new coupe with styling reminiscent of ’67-’69 first-generation models, particularly the ’69 variant. A convertible version was scheduled to follow in a year or so, providing it wasn’t eliminated as part of GM’s cost-cutting program.

At the same time, a raft of new hybrids hit the market including variants of the Chevrolet Malibu, Saturn Aura, Nissan Altima and Toyota Camry as well as the Chevrolet Silverado pickup and Tahoe SUV, GMC Sierra pickup and Yukon SUV, and Aspen and Durango SUVs, with more slated for introduction in the coming year.

Increasing use of hybrid powertrains, smaller forced-induction engines, diesels and other mileage-enhancing protocols would become increasingly important to auto makers as they faced the government’s stricter fuel-economy standards beyond 2009.

abinder@wardsauto.com