How the Economy is Affecting the Auto Industry

Automakers are committed to improving fuel economy and reducing CO2, but meeting this commitment is a big challenge, especially under foreseeable market conditions. Now more than ever, in this difficult economic environment, we need the certainty of a single national standard set by the federal government.

America can’t have a healthy economy without a healthy auto industry, because autos represent the country’s largest manufacturing base. Almost 4% of U.S. gross domestic product is auto-related. One out of every 10 U.S. jobs, or about 13 million, is auto-related, and auto workers receive $335 billion annually in compensation.

November was the worst auto sales month since January 1982. With just 746,789 vehicles sold in November, light-vehicle sales fell for a 13th straight month. This led the seasonally adjusted selling rate to decline from 15.1 million vehicles in March to 10.2 million this month.

Economic turmoil is affecting auto consumers and communities in many ways.

Everyone is connected in this economic crisis. Fewer sales by dealers lead to cuts in auto production, which leads to less work for assembly-line workers. So fewer parts are needed from suppliers, and those workers then buy fewer goods from shopping malls. Ultimately that leads to more defaults on mortgages, which leads back to fewer sales by car dealers. Auto manufacturing builds strong communities when the industry is healthy, and when automakers are ailing, there is a ripple effect through the economy.

• Consumers are hurting.
  • More than 90% of new vehicles are financed with credit, so it is crucial to our industry’s survival that consumers have the ability to borrow money.
  • Autos are a major purchase, like buying a home. The average price of a new vehicle now exceeds $26,000, approaching one-half of the annual median income in the U.S. ($66,000).
  • Consumers are having difficulty obtaining financing. About 50% fewer average-income car buyers have been approved for loans in 2008 than in 2007 (CNW Research).
  • Consumer auto loan delinquencies are rising. More than $25 billion in consumer loans for autos are past due (Experian).

• Dealers are hurting.
  • Autos account for $690 billion of U.S. retail sales, or about 20% of all U.S. retail sales.
  • 2008 sales figures have declined sharply. November sales alone dropped almost 37%, to their lowest level since 1982. Industry sales dropped almost 32% in October.
  • About 2,000 U.S. new-vehicle dealerships – nearly one of every 10 – will close in 2008 and 2009, the National Automobile Dealers Association projects.  The National Association of Minority Automobile Dealers projects that 75% of its 2,100 members could go out of business by the end of 2008.
  • Autos sales generate more than $10 billion dollars of annual tax revenue (sales tax, registration fees, payroll taxes) every year, so a drop in auto sales hurts state budgets too.

• Suppliers are hurting.
  • Every auto plant job generates about 5 jobs among suppliers and the surrounding community (CAR); by comparison, a Wall Street job generates 2 additional jobs (Bloomberg).
  • Employment among automotive suppliers continues to decline, dropping more than 18% from 722,600 in 2007 to 590,000 in 2008.
  • In the first three quarters of 2008, almost 100,000 automotive jobs were cut, the second highest number after jobs job losses in the financial sector (110,000+).

Despite the market turmoil, the auto industry is still investing in the future.

• Automakers supported passage of the 2007 Energy Bill, which requires a 40% increase in fuel economy by 2020, and now auto manufacturers are working to develop and introduce more fuel-efficient technology.
• In 2009 there will be more than 130 models available with highway fuel economy ratings of more than 30 mpg (EPA). That’s an increase of 25%+ over 2008 in the number fuel-efficient models on sale.
• In 2009, automakers are planning to sell 25 models of hybrids, 8 models of clean diesel, and 38 models of FFVs. More models are planned for introduction in 2010.
• The economic reality is that building autos is a capital-intensive industry. A new powertrain can easily cost $1 billion to build. A single test car costs $300 million or more.

We need to preserve mobility and the auto economy in the U.S. in many ways:

• A Federal Standard: It is more important than ever that there is a single fuel economy standard set by the federal government, and this standard needs to make both environmental and economic sense. The success or failure of the industry will have national economic consequences. Adherence to one federal regulatory standard (reformed CAFE) enhances the likelihood that those national economic consequences will be positive.
• Expedited Funds: The 2007 Energy Bill raised fuel economy standards and authorized $25 billion in loans to automakers. It is important that the Administration release those funds as soon as possible - certainly in 2008.
• Consumer Support: The vitality of U.S. manufacturing and the auto industry is a big part of a stable economy. Automakers support government taking further steps to help consumers get back into auto showrooms, such as increased credit availability and efforts to spur consumer sales.