Automotive decline could be deeper than expected

North American motor vehicle production dropped 9% during the first quarter due to the overall drop in consumer spending and the ongoing strike at parts supplier American Axle & Manufacturing Holdings, suggests analyst David Leiker at Baird Research.

This explains why bookings are in disarray for makers of automotive-grade plain and zinc-coated steel, common alloy aluminum sheet, copper wiring harnesses and lead for batteries. About 3,600 United Auto Workers union members have been on strike at American Axle's five U.S. facilities since Feb. 26. American Axle makes axles, drive shafts, stabilizer bars and other components for automakers.

The auto assembly cutback is much higher than the 5% forecast earlier by numerous automotive analysts and is pinned to weaker-than-expected sales. The Detroit News this week reported that “automotive sales are falling harder and faster this year than anyone anticipated because of a toxic combination of factors not seen since the oil shock of the 1980s”—citing a weak economy, sagging consumer confidence, record-high gasoline prices and hard-to-get credit.

Automakers, consultants and financial analysts have been cutting their forecasts after the weaker-than-expected start to the year. But they have not arrived at a consensus about this sales slump because it defies the usual patterns. "It's an unusual downturn. It's probably the deepest since the 1980s, but technically, this is still not a recession," Jesse Toprak, director of market analysis at online automotive research site Edmunds.com tells the Detroit newspaper. “Nothing like this has ever happened before.”

Economists Carlos Gomes at Scotiabank.com tells Purchasing.com this morning that “the deterioration in the auto marketplace probably will continue until summer,” when his forecast suggests stabilization and a slight pickup in assembly and sales in the fourth quarter. However, he still sees a 5% slide in U.S. and Canadian motor vehicle sales for 2008 to 15.3 million units from 16.1 million in 2007.

Normally, in a weakening economy, demand for oil falls and prices subside. And interest-rate cuts usually encourage banks to lend more generously, enabling consumers to keep spending. But this time, there's no such relief to encourage car buyers. Oil prices keep rising, pushed by strong demand in huge emerging economies such as China. In the United States, the impact of high gas prices has been magnified this time around because light trucks make up half the market.

And the Detroit Free Press says that Ford Motor Co. is forecasting a drop-off in industrywide sales of minivans to a 23-year low this year while large pickups decline to the fewest in a decade as more consumers turn to smaller cars. Minivan sales may drop below 600,000 for the first time since 1985 and large pickups may slide to fewer than 2 million, a level they have topped annually since 1998, says George Pipas, Ford sales analyst. Pickup sales have been hurt by a declining housing market.

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