Relax folks!: expectations make slowdown seem worse than it is

When consumers failed to flock in record numbers to auto dealerships this spring, automakers seemed ready to look up Dr. Kervorkian's phone number. But since Dr. Jack only deals with people with no hope in the world for survival, he would have turned them down.

The fact is that the patient is stable, if not exhuberant, and expects to make a recovery. The problem facing the automotive world is that it's not doing as well as most experts thought it might after sales spiked upward early in 1994.

"If you'd have told me three or four years ago that vehicle sales would be where they are today I'd have been pleased," sums up George Perry, president and CEO at Siemens Automotive. "Our problem now is one of expectations. Everybody's plans reflected those expectations."

The '94 automotive sales binge, combined with other evidence of an economy that was perhaps heating up too fast, scared the inflation-wary Federal Reserve Board. The Fed reacted by inching up short-term interest rates in small-percentage-point steps between February 1994 and February 1995. This tinkering held inflation at bay but it also slowed the economy, which is why the Fed recently reversed the uphill climb and lowered the rate by .25 of a percentage point. As usual it's a delicate balancing act.

Besides higher interest rates, economists blame the sales slide (or failure to reach expectations, as Mr. Perry describes it) on the Internal Revenue Service delaying 1994 income tax refunds to control fraud, higher taxes and even the Oklahoma City bombing; people hold off buying big-ticket items during national crises, goes the theory.

Whatever the reasons, the Big Three trim their 1995 forecasts -- although not precipitously. General Motors Corp. goes from 15.6 million to 15.3 million, Ford Motor Co. slashes 800,000 to 15.1 million, and Chrysler Corp., early on the most bullish of the Big Three, adjusts from a somewhat ridiculous 16.5 million units to a more palatable 15.2 million cars and light trucks.

Although considerably more bearish than earlier projections, the automakers apparently remain more otimistic than their suppliers and independent experts.

Timothy D. Leuliette, president of ITT Automotive, admits he's "more pessimistic than general industry estimates." He's concerned about growing new-vehicle inventories and says the outcome will be determined by sales strength "as we go from the third to fourth quarter."

Mr. Leuliette, for one, thinks the Fed acted too late with its recent cut, and that further reductions in the .50 to .75 percent-age-point range "are needed now" to avert a prolonged slowdown or trough. His 1995 prediction: "Retail vehicle sales in the 14.2- to 14.3-million range, and certainly no better than 14.5 million."

In line with the new Big Three projections, industry production planners made cuts in their U.S. third-quarter schedules, while posting nearly offsetting increases in Mexican and Canadian output targets. The net result is a fairly insignificant 3,700-unit reduction in total North American output for July-September. A mid-summer reassessment is expected after industry executives have had time to study the impact of the one- and two-week July vacation shutdowns (followed by an additional week of inventory adjustment downtime at some plants).

With many prognosticators still predicting U.S. 1995 vehicle sales at around 15.2 million to 15.3 million units, some suspect manufacturers will either slash third-quarter plans or reduce October-December output below a year earlier by more than the currently indicated 5% to 8% to keep year-end stocks from bulging.

Alan Baum, editor of the Michigan-based AutoFutures forecasting service, is one expert who didn't get too excited early in 1994. He sees 1995 sales coming in at 14.6 million units with production staying at 1994 levels, reflecting Japanese transplant exports to their home market.

Mr. Baum explains why the expectations got out of hand. "The Big Three and Wall Street like to see big numbers," he says. "Wall Street particularly lives for the moment and doesn't really care about an industry's historical activities."

Kurt Brown, an analyst at DRI/McGraw-Hill Data Resources, expects the economy to be soft until year's end, leading to his agreement with Mr. Baum that 1995 will be a 14.6-million year.

"This is a slowdown, not a plunge," says Mr. Brown. "It's all because expectations were so high. For an industry that has had 10% to 13% declines one year after another, a 2% decline is no big deal."

DRI's most recent North American Light Vehicle Forecast Report (see chart) indicates a "soft landing" akin to 1985-86 is more likely than a deep crash like 1982 or 1990-91.

Mr. Brown thinks Chrysler's new minivans and Ford's redesigned Taurus/Sable will renew consumer interest and breathe new life into the marketplace. That, along with other factors, gives Mr. Brown an optimistic outlook for the future.

While calling the recent drop in short-term interest rates "trivial," Mr. Brown says, "we expect a series of cuts, eventually getting down 1 to 1.5 basis points, just like they went up, in 14 or 15 months."

Mr. Baum's AutoFutures report concludes there's a 60% chance the market will come in at 14.6 million. "If (Fed Chairman Alan) Greenspan has indeed earned the right to gloat over having helped to pull off a soft landing, we think that the U.S. auto market will escape 1995 with only a 3% sales drop," the report states.