Reuters: 1 in 5 Auto Dealers Could go Under by 2009

I said in late 2007 (when many were arguing there would be no recession and in fact everything was fine since the Federal Reserve had our back) that 2008 would be the worst year in 2 decades for auto sales. Ford's numbers are out and they are staggering (down 34%) Yet another group of companies who promised "2nd half recovery" back in the spring.

• Tight credit, economic worries and high gasoline prices combined to cut Ford Motor Co.'s U.S. sales once again in September, with the beleaguered automaker reporting a 34 percent decline from the same month last year.
• It was Ford's worst sales month this year, and the results are a strong indication that analysts' forecasts of another dismal month will come true.
• Analysts have predicted September declines of more than 20 percent for most major automakers when compared with the same month last year as upheaval in the financial markets unnerved consumers.

Many Americans were buying autos with their house ATM. Again, a year ago at this time along with Paulson's "subprime is contained" sing song, we were treated to "what is the fuss about the general economy? housing is only 4.5% of GDP" sing a long on CNBC. Now you are going to see the lagged effect of the "fuss" a few of us were making. Again, this will be (and is) the first consumer led recession since the late 70s/early 80s. Too many investors do not read history, and are not old enough to have lived through that so are used to "corporate" led recessions of the early 90s and early 00s. We've created such a bubble that this is the first time housing leads the economy down rather than vice versa. We've been so inoculated from downturns by government actions that even a 1978 type of recession is going to feel a lot worse than it did back then, since we've not been allowed to have a true recession for so long. Further, we actually had a national savings rate in the late 70s - people saved some of their income instead of spending every last dime as we do now. (some as part of the culture, and others forced to - just to survive in dog eat dog America) [Dec 2007: Do the Bottom 80% of Americans Stand a Chance?] So there is no buffer for most now - with our 0% savings rate - as there were for some in the last major consumer led recessions (we had multiple ones in the 70s/early 80s). I am just hoping it does not get worse than that period - this credit crunch adds a dimension that is simply impossible to model with all the permeations.

I know no one cares about auto jobs because that only affects "Midwest people" with their "old school industry that is useless in our new and cool service economy", and it is not the high and mighty in NYC finance who instead of producing "things" produce "financial innovations of great value".... but some say 1 in 10 jobs in America have at least an indirect relation to automotive (i.e. restaurants, grocers, hair salons etc that serve auto related workers). Reuters has an interesting story that potentially 1 in 5 Auto Dealers could go up in smoke in the next year or so. So mock the industry all you like, but each loss has a ripple effect... this is one of the last things we actually build (mostly) in the country now that we've gotten rid of most textiles, most steel, most everything that doesn't have to do with Walmart, healthcare, restaurants, defense, or government.

• As many as 3,800 U.S. car dealerships could fail this fall and into 2009 -- nearly one in five -- because of weak sales, increased operational costs and the credit crunch, according to a forecast released on Wednesday.
• "An increasing number of dealers are simply closing their doors because sales have plummeted, credit has dried up, the overall retail environment is increasingly challenging and potential investors are sitting on the sidelines," said Paul Melville, a partner with Grant Thornton LLP, which issued the forecast.
• "In addition, the domestic automakers who badly need retail consolidation are not spending much of their scarce capital on the problem because the economy is doing it for them," he said.
• Bill Heard Enterprises Inc, one of the biggest General Motors Corp Chevrolet dealerships, filed for bankruptcy on Sunday, citing operating losses, decreased demand for vehicles and lack of credit. At its peak, Alabama-based Heard's revenue was about $2.5 billion per year, according to the bankruptcy filing.
• With U.S. light vehicle sales predicted to drop to the 13.7-million-unit range in 2009, the study said that about 3,800 dealerships, about 18 percent of the total number of U.S. car dealerships at the end of 2007, will need to close. (a typical year in the "credit is free! economy" has been 16-17M+)

CNNMoney.com chimes in

• If you want to see how America's credit crisis is hitting the streets of your hometown, go to your local car dealer. Auto dealers depend on credit. They need it to run their stores and their customers need it to buy their products. From every angle, credit trouble hurts.
• There could be 300 to 400 fewer auto dealerships in America by the end of the year, predicted Paul Taylor, an economist with the National Automobile Dealers Association. In an ordinary year of economic growth, the industry adds 75 to 150 dealers, he said.
• "We're seeing people with Beacon scores that are pretty darned good," Fitzpatrick said, "and the finance companies are just looking for reasons to turn them down."
• In most of the country, the collapse of the housing market has left consumers without the low-cost home equity loans that drove car sales in recent years. (house as ATM for people who live paycheck to paycheck and have to "keep up appearances" and "spend like the Joneses") Also, the drain of home equity has left potential customers feeling poor, said NADA economist Paul Taylor. That, as much as the actual loss of low-interest credit, has hurt car sales.
  

Frankly, as I've written the past year, there is an oversupply of everything retail in America (including car dealers) - that is what happens when you consume over your head for decades - you overbuild everything that serves the consumer. So we'll see a lot of shrinking or as they say in corporate America "right sizing". Now the problem is we've taken a national mandate to turn into a "service" economy that is based 70% on consumers spending. That is a far different economy than we had in the 1970s - the last time the consumer led us into a recession. Job losses we've seen so far (which are heavily under reported by the government) are going to look benign compared to what is coming down the road. This is because so many more people now (vs 70s/early 80s) work in jobs that demand consumers to spend, spend, spend.

Remember, the fictitious monthly government report on unemployment is coming this Friday and the market always reacts strongly to that. But we are just in the early stages - as we focus on saving the financial system no one is really talking about the crumbling economy. Where are all those pundits who screamed "no recession" in latter 2007 and then screamed "2nd half recovery" in early 2008? (older readers will remember me mocked that call almost daily) They are back on their normal posts in the media saying "once we get this bailout passed we'll be good, 1st half 2009 recovery is on track". Why do we continue to bring out these retreads who have been wrong every step of the way? If you are wrong every step of the way, I am now supposed to trust your judgement on when we recover? Please.

We are going to be a leaner, meaner (hopefully not literally?) nation when we come out of this. But it won't be next quarter, or the quarter after that, or the one after that - one day the pundits will realize this. 2008 has been very ugly for the stock market, while it has only begun to really hurt the Main Street economy. In 2009 I think the Main Street economy is going to get the hurricane force winds - the less credit available in a credit driven economy, the worse it gets. 2009 will be the Year of Shrinking.

EDIT 4 PM: You know things are bad when Toyota (TM) the "king of US auto" has sales down 30%+!

• Beleaguered Ford reported a 34 percent decline, while Chrysler said its sales fell 33 percent and Toyota posted a 32 percent drop. "It was tantamount, really, to a natural disaster," he said.
• General Motors Corp., buoyed by its offer of employee pricing on most of its vehicles, saw U.S. sales drop a less severe 16 percent, boosting the automaker's market share to its best level all year. "A few years ago I'd have jumped out the window with these numbers, and we're on the 39th floor here," he said in a conference call from GM's downtown Detroit headquarters.