Detroit area business economists present auto outlook

By Paul Traub

The U.S. auto industry has just completed its best sales year ever, reaching 17.837 million in total vehicle sales in 2015. Falling gasoline prices together with affordable finance rates helped the Detroit Three (D3) manufacturers (Fiat Chrysler, Ford, and General Motors) by making crossover vehicles, SUVs, and pickup trucks more affordable to own and operate. Chart 1 below shows how the demand for more light trucks has helped the D3 stop the erosion of their market share.

D3 Market ShareSource: Author’s calculations based on data from Wards Automotive.

During the year, the D3 manufacturers also negotiated a new contract with the United Auto Workers (UAW) union, aimed at rewarding workers for remaining loyal during the hard years of the recession while at the same time allowing the companies to remain competitive with their global counterparts. To help us understand where the U.S. auto industry is headed, DABE (the Detroit Association of Business Economists) members gathered at the Detroit branch of the Federal Reserve Bank of Chicago on Thursday, January 14, 2016, to present their annual auto outlook. The 2016 Bob Fish Memorial Automotive Industry Luncheon meeting addressed the following questions: How long will sales continue at their current pace? Will fuel prices remain low for an extended period? What happens to vehicle affordability now that the Fed has started to raise interest rates? And, how will the new UAW contract affect the competitive position of the D3? The speakers included the chief economist for General Motors, Mustafa Mohatarem and the director of the Industry and Labor Group at the Center for Automotive Research (CAR), Kristin Dziczek.

The program began with Mohatarem’s presentation, entitled “Peak or Plateau – U.S. Auto Industry Beyond 2015.” In summary, Mohaterem said that:

1. Vehicle sales and the economy in 2016 will be more or less a repeat of 2015.
2. The North American economies will grow at a slow and steady pace, with auto sales hitting a new record high.
3. The modest recovery in Western Europe will continue, along with modest growth in new vehicle sales.
4. Slowing economic growth in China will be a source of global economic uncertainty as China makes the difficult transition from
export/investment-led growth to growth in services and domestic demand.
5. The end of the commodity boom will impart significant downward pressure on many emerging and commodity-dependent economies.

Click here to see Mohatarem’s entire presentation.

The discussion continued with a presentation from Dziczek entitled “Process and Outcome of the 2015 UAW Auto Negotiations,” in which she summarized the 2015 contract negotiations, focusing on the union’s gains and losses.

The gains include:
1. Pay increases and profit sharing/lump sums (largely cash).
2. The start of phasing out tier 2 wages, while adding to the number of wage scales.
3. Maintenance of health care benefits without additional cost to the workers with the same health care for everyone at General Motors and Ford.

The losses include:
1. No reinstatements of a cost of living allowance (COLA) or JOBS bank/GEN pool.
2. No overtime after 8 hours a day, only after 40 hours a week.
3. The union did not win back a three-year grow-in to top wages or any pension increases.

In summary, most of the cost of the contract to the original equipment manufacturers (OEMs) was in the form of one-time cash payments rather than ongoing cost increases. Part of the problem faced by the UAW stemmed from the fact that younger workers wanted to see more job security and hiring as part of the contract because that would push them up the pay scale to tier 1 wages. At the same time, older workers who were already making tier 1 wages wanted to see larger pay increases and were willing to sacrifice jobs to get them. In the end, the increases in cost from this contract were kept to a minimum, compared with pre-2009 contracts.

Click here to see Dzicek’s entire presentation.

Recap of the Federal Reserve Bank of Chicago’s 29th Annual Economic Outlook Symposium

By Martin Lavelle

On December 4, 2015, the Federal Reserve Bank of Chicago hosted its 29th annual Economic Outlook Symposium (EOS). The EOS allows economists, business leaders, financial analysts, and other experts to gather and share their respective views on the U.S. economy and individual sectors especially important to the Midwest economy. Also, EOS participants are given the chance to submit their respective projections for the year ahead. These projections are subsequently used to come up with a consensus (median) forecast for real gross domestic product (GDP) and related items.
This blog entry is a summary of what was presented at the latest EOS. For a more in-depth look into what was presented, please click here to read the Chicago Fed Letter for the event. Most of the presentations that were delivered during the EOS can be found here.

• 2015 forecast review: Real GDP growth in 2015 was slightly weaker than expected in the consensus outlook from the previous EOS held in December 2014. Growth in real personal consumption expenditures was slightly higher than anticipated, partly because of stronger than expected growth in light vehicle sales. However, real business fixed investment grew at a significantly slower rate than predicted. New home construction just missed forecasted activity levels. The unemployment rate was lower than originally projected, while inflation (as measured by the Consumer Price Index) came in well below the predicted rate.

• Outlook for consumer spending: According to Scott Brown (Raymond James & Associates), consumer spending is forecasted to slightly decelerate in 2016 in part because of headwinds from rising energy prices (he expected oil prices to average around $50 per barrel by year-end). The pace of job growth has been strong, but is expected to moderate this year.

• Outlook for financial services: Brown also noted that credit conditions are fairly tight, but they should ease. The (then-anticipated) interest rate hike in December by the Federal Open Market Committee (FOMC)—the Federal Reserve’s monetary policymaking arm—shouldn’t dampen lending for a while, Brown said.

• Auto industry outlook: According to Yen Chen (Center for Automotive Research), U.S. light vehicle sales and production are expected to peak in 2018 (at around 18.6 million units and 12.2 million units, respectively) before falling slightly. Auto loan debt is expected to surpass student loan debt as the highest form of household debt, excluding mortgage and home equity debt, over the coming years. Meanwhile, Mexican light vehicle production capacity is expected to increase by over 2 million units in the next seven years largely because of lower labor costs (thereby reducing the U.S. share of North American production).

• Steel industry outlook: Robert DiCianni (ArcelorMittal USA) indicated that U.S. steel consumption is projected to modestly increase in 2016, based on his analysis of several steel-intensive sectors of the economy. For instance, the pace of growth in residential construction is expected to accelerate, while year-over-year growth in nonresidential construction is anticipated to level off. Moreover, both U.S. auto sales and North American auto production in 2016 should be similar to their respective levels in 2015. Global steel consumption is expected to increase slightly in 2016 after decreasing last year. The slowdown in Chinese steel consumption has been a major factor in the decelerating rate of global steel consumption in the past few years.

• Heavy machinery outlook: Glenn Zetek (Komatsu America Corp.) stated that U.S. demand for earth-moving equipment is at healthy levels, though demand has slowed significantly in states where energy production had been intense over the past few years. Equipment demand for single-family residential and transportation projects is expected to increase in 2016. But heavy machinery demand for nonresidential projects should moderate this year; the prospects for equipment demand to complete such projects look more promising over the next couple of years, as nonresidential fixed investment is expected to move up moderately and equipment usage is near its mid-2000s peak. Equipment usage for mining, energy, and rental needs are predicted to decrease.

• State and local government debt outlook: According to John Mousseau (Cumberland Advisors), municipal bond yields for the highest-rated securities with maturities greater than ten years are higher than comparable U.S. Treasury bonds—the opposite of what’s normal. Even with Detroit’s bankruptcy and other cities’ and states’ latest financial struggles, municipal bond quality generally remains higher than corporate bond quality. Interest rate increases won’t be terrible for issuers of municipal bonds because historically, municipal bond yield increases failed to match the size of federal funds rate increases.

Conclusion: 2016 economic outlook

According to the latest EOS consensus outlook, U.S. real GDP growth in 2016 is expected to increase slightly above its historical trend. Inventory levels are expected to rise at a slower pace. Residential investment is projected to rise at a strong pace, with slow and steady improvement predicted in new home construction. Growth in business fixed investment should continue at a decent pace, with moderate growth anticipated in industrial output. The dollar is estimated to slightly appreciate versus major currencies, which should increase the U.S. trade deficit to levels not seen in the past decade. Forecasters expect interest rates to rise, but remain at relatively historical lows. The unemployment rate is predicted to edge slightly below current levels. Inflation is expected to move up (closer to the FOMC’s inflation target) as oil prices strengthen slightly.