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.