DETROIT – Attendees at last week’s Ward’s Auto Interiors Show may have hoped for words of encouragement from billionaire investor Wilbur Ross Jr., but they found no silver lining in his keynote speech.
A dedicated student of economics who uses a vast array of financial indicators to guide his acquisitions of companies in various manufacturing sectors, Ross began his speech by talking about the fundamental problems facing the U.S. economy – and the auto industry, in particular, which has struggled through three bad years in a row.
The chairman and CEO of W.L. Ross & Co. LLC quoted a litany of economic statistics that left the crowd depressed, if not alarmed.
“Unfortunately, next year may be even more challenging,” says Ross, founder of International Automotive Components Group, a supplier of interior trim.
“Why am I pessimistic? After dropping by 400,000 units in each of 2006 and 2007, sales are likely to go down by more than 1 million units this year, and the mix will continue to move toward the small cars and away from pickups and SUVs,” Ross says.
In 2007, light-vehicle sales in the U.S. totaled 16 million units, down from 16.5 million in 2006, according to Ward’s data.
“Our automobile market is the most highly saturated in the world, with three cars for every four people of driving age,” Ross says. “When you eliminate those without licenses – the indigent, the physically or mentally impaired and those in prison – you have practically one car for every actual driver. It is essentially a replacement market.”
And fewer people are replacing their vehicles as they lose their jobs, retire early or cope with stagnant wages or even pay cuts.
“Median per-capita income has stalled at about $61,000 for the last five years, putting middle America under severe economic pressure,” Ross says.
People have been borrowing to support a higher standard of living, but that trend, ironically, has had disastrous consequences as consumers have defaulted on loans, sparking the credit crunch.
Household debt has increased from $9.5 trillion in 2003 to $13.8 trillion in 2007, Ross says.
“We actually had a recent year when our nation spent more than we earned, so we had dis-saving for the first time since the Great Depression,” he says. “It’s not a sustainable phenomenon.”
In 2006, Americans remortgaging their homes extracted close to $350 billion in the transactions at a time when those properties were losing value.
“Last year was the first time since the Depression when housing prices fell nationwide,” Ross says, adding that home prices have dropped by 14.1% in the last 12 months and, since the 2006 peak, are down 16%.
“This has reduced the population’s net worth by $3.68 trillion, thereby causing at least a $138 billion decline in consumer spending,” he says.
The worst may lie ahead. Mortgage delinquencies and foreclosures continue to rise, and the Congressional Budget Office says home values must fall by another 15% to achieve the historical relationship between sale values and rental values, Ross says.
“Even without that decline, Moody’s estimates 10.6 million families will have negative equity in their homes by June 30,” he says.
And first-time buyers may have to wait longer for the American Dream, as 90% of banks are tightening mortgage-lending standards, Ross says.
“In April, sales of new homes dropped to 526,000 from 913,000 units a year earlier, and new housing permits fell from 1,457,000 to 978,000,” he says.
Car loans also are getting more expensive. “The duration of financing has gone from an average of 57 months five years ago to 64 months now, and some manufacturers are considering as long as 80 months,” Ross says.
In February, 26.7% of all cars being turned in had negative equity averaging $4,342. “So the balance owed on the new car was more than the purchase price,” he says. “Even harder hit were SUVs, 36% of which had negative equity and light trucks at 40%.”
In the big picture, the same consumer distressed by falling home prices also has a disincentive to buy a new car now, he says.
On the sore topic of fuel prices, Ross says consumers must brace themselves to pay $4.75 per gallon in the near future.
“For a typical family, this would cost something over $200 per month. Meanwhile, consumers are also paying more for home heating, food and their staples,” he says.
With oil priced early last week at $125 per barrel, “Americans are spending a terrifying $105 million per hour, 24 hours per day, 365 days a year,” Ross says. He points to a Goldman Sachs forecast that oil will hit $200 per barrel.
“If they prove to be correct, the effect on consumers in general and on car sales, in particular, would be devastating,” he says. “Already people are using more mass transit and carpooling and scheduling fewer trips in order to save money.” In March, miles driven dropped by 4% – “a very rare occurrence,” Ross says.
In the first four months of 2008, Americans spent $158 billion on gasoline, double the level during the same period five years ago, he says. “We spend 3.7% of our disposable income on transportation fuel.”
“The bottom line is that the American consumer is both tapped out and burned out,” he says. “Consumer confidence is at a 28-year low, and 81% of adult Americans polled believe we are in a recession.”
Ross says he believes a recession will not be official for another six months. “But I believe it already has started and that we are in for at least a year of stagflation or worse,” he says.
Ross questions the value of President Bush’s economic-stimulus package, which is giving $600 each to eligible Americans this summer, and $300 for each eligible child under 17. “A one-time rebate of a few hundred dollars is hardly a reason to buy a $20,000+ car,” he says.
Despite his downbeat message, Ross, 70, managed to deliver the barrage of statistics not as a lecture or sermon, but in a calm, patriarchal tone, as if it were dinner conversation.
He told the story of a recent discussion with a French economist who called Americans “energy pigs.”
Ross asked for an explanation, and the economist asked what temperature he keeps his office. Ross said about 68º in summer and 72º in winter.
“He said, ‘See if you would keep it at 68º in winter and 72º in summer, you’d save umpteen zillion barrels of oil.’”
Ross concedes the economist is probably right, although he’s not sure how soon he will adjust his thermostat. “At some point, people’s behavior will change,” he says. “Lights will tend to get turned off when people leave the room. There’s a lot of things we can do to make a change.”