Third Quarter Auto Production Expected to Boost U.S. GDP

Apparently, the U.S. auto industry is working off a significant backlog of inventory because I have been hearing that pretty much everyone in North America is planning to ramp up production for the third quarter. This is prima facie evidence of the huge inventory-based production changes which I have said will make Q3 and Q4 look much better than Q1 and Q2. In April, in my post “The Fake Recovery,” I said:

Obviously, this means that U.S. Q1 and perhaps even Q2 GDP will be very low due to the subtraction of inventories now being purged. However, when we get to Q3 and Q4, this effect will be gone and quarterly and yearly comparisons will look favourable. So the inventory purge may mean a huge upside surprise to GDP in the second half of the year and early 2010 – potentially enough to see positive GDP numbers.

The automakers are doing their part to make this story come true.

1. Chrysler (via Bloomberg):
   

   Chrysler Group LLC, the U.S. automaker created out of bankruptcy last week, said it will resume production at seven vehicle plants the week of June 29.

   The facilities are in Michigan, Ohio, Missouri, Ontario and Mexico, the company said today in a statement. Chrysler reopened a Detroit car factory on June 15. Other assembly plants may not open until late July after they are reconfigured to build 2010 models, spokeswoman Dianna Gutierrez said in an interview…

   Based on the current sales level and limited production, Chrysler’s inventory may be well under 200,000 at the end of July, said Haig Stoddard, an automotive analyst at IHS Global Insight’s Troy, Michigan, office.

2. Ford (via USA Today):
   

   Ford is boosting its third-quarter production schedule after seeing more demand for its cars and trucks in June, the company said Monday.

   Ford (F) plans to increase production by 16% compared with the third quarter of 2008. The automaker had said it would increase production 10%, but is adding another 25,000 vehicles because it’s seen some stabilization in June auto sales, to be reported Wednesday.

   The news comes amid several preliminary reports that June sales have been stronger than recent months. Last week, Edmunds.com and J.D. Power reported that June sales had increased significantly compared with May sales.

3. GM (via WSJ)
   

   …The deep discounts that General Motors Corp. (GMGMQ.PK) and Chrysler Group LLC have offered to boost sales are also likely to bolster June sales.

   Those factors suggest "the worst is behind us," Mr. Pipas said. "Even if sales fail to hit the 10 million milestone, we’re still not slipping back." A GM spokesman also said an annualized 10 million sales rate is possible for June.

Expect Q3 to be significantly better than Q2. Moreover, we should also expect Q2 to be well above the -5.5% annualized GDP change we saw for Q1 in the U.S.

Comments

[Michael J. ...:]

Of course the auto companies can increase production if they're giving the cars away. The question for the long-term is whether the sales are being driven by the incentives or whether demand will still be there once the incentives are reduced or go away.

I'm concerned that once the current crop of buyers is gone, the "easy" sales are over and Detroit will actually be in a worse position as it will either have to cut back production or maintain it will a never-ending stream of incentives. This a true recovery is not made of.

Jun 30 05:43 PM

[Edward Harr...:]

Well said. Pulling demand forward is always going to work wonders short-term. But, is it sustainable? I am sceptical.


On Jun 30 05:43 PM Michael J. Golde wrote:

I'm concerned that once the current crop of buyers is gone, the "easy" sales are over and Detroit will actually be in a worse position as it will either have to cut back production or maintain it will a never-ending stream of incentives. This a true recovery is not made of.

Jun 30 07:03 PM

[sethmcs:]

I wonder how much autos pulled down GDP. Does anyone know? Knowing that number might give us an idea of how much increased auto production might raise GDP. Autos and related industries are weighted somewhere between 10% - 16% of the GDP. Does anyone have better figures?

Jul 01 12:45 AM

[Steve Funk:]

I think you have to take these numbers with a grain of salt. Traveling in Michigan this spring I talked to GM workers who were notified of 10 week plant shutdowns this summer lasting into August. That will affect Q3 production and in the best of times Q4 production schedules are light. Since GM and Chrysler production schedules are near zero it only figures that any increase next quarter will be a huge percent increase. I think you have to look at absolute numbers here. With zero production the inventory reduction is bound to look good, even with sluggish sales.

On top of that, with the G'mint now involved with production planning I see product shortages next year. That is never good for anybody. Everyone thinks I am crazy but auto production scheduling is incredibly complex and interlinked. The long shutdowns that are going on now are bound to push some key suppliers into bankruptcy. Congress has already brought up the matter of how far they will go to support bankrupt suppliers and they are shying away from the matter (start by looking at Delphi). Those bankruptcies will further disrupt production.

Gee, in the 1960's and '70's didn't we see product shortages in the USSR when their master scheduling was most in control? Don't fool yourself, it could happen here. Bottom line, stay away from investing in auto or suppliers, and don't look for them to pull us out of the recession soon.

Jul 01 11:16 AM

[David Ristau:]

This is not fake good news. This is great news. How can anyone say that improving auto sales is fake? It shows a consistent pattern of bullishness. If on month you sell 200 then the next 100, then the next 150, and thenext 175, aren't you on the right track?

Americans are turning to Ford as the beacon of hope for American car industry. Ford is responding offering quality cars. Their cars have been rated higher and higher over the past 2 years by various consumer reports. Sales are doing better than even the company had earlier this week expected.

The only way you get people to buy is by lowering the price to spark more demand. Simple economics. Yet, as you lower the price and sell more cars. You need more workers. More workers equals more salaries. More salaries equals more purchases and consumers.

Go to Economics 101. This stuff is extremely bullish no wonder the market is up!!!

David Ristau
theoxengroup.com

Jul 01 02:13 PM