Can the auto industry predict an impending recession?
(WXYZ) – In the past, Michigan and the auto industry have been leading indicators as we head into recession.
There have been job cuts or layoffs in the automotive industry in recent months. Stellantis confirms that there will be an indefinite layoff at the Sterling stamping plant starting next week.
At Avis Ford on Telegraph Road, retired Detroit Lions offensive lineman Larry Lee tackled the task of buying a new vehicle for his wife. This is something they would normally have done two years ago.
“It worked where his lease ended at the start of COVID, so we said we didn’t need two vehicles and weren’t going anywhere,” Lee said.
Now things have changed.
“It’s a little too active for a single vehicle now,” Lee said. Lee’s story is an example of the pandemic’s pent-up demand and is part of why Avis Vice President Edmund Douglas is struggling to maintain inventory.
It has 70 vehicles in stock but uses an average of 500. The other reason: The pandemic has caused supply chain issues and a shortage of semiconductor chips, which are often made in China.
“I think the F-150 has about 1,200 chips or something like that,” Douglas said.
The result? While overall prices for things increased by 8.6%, between May 2021 and May 2022, prices for new vehicles increased by 12.6%. Used vehicles are up 16.1%.
Now that the Federal Reserve is raising interest rates, car loans will become more expensive.
Douglas says they are about double what they were a year ago, almost 6%.
“You factor that in with interest rates, you could see payments up to about $100 more than a year ago,” Douglas said.
Sandy Baruah is CEO of the Detroit Regional Chamber and a member of the board of directors of the Federal Reserve Bank of Chicago-Detroit Branch.
“There’s definitely the old rule, when the nation got a cold, Michigan got a flu,” he said.
According to Baruah, the auto industry and Michigan could actually be positioned to outperform the past if we experience an economic slowdown as the Federal Reserve attempts to reduce economic demand and inflation with higher interest rates. .
“They really focus their production on high-performance vehicles, high-value vehicles, GM trucks, Ford Broncos, Jeep Grand Cherokees,” he said.
Daniel Hearsch is Managing Director of AlixPartners – and co-head of its Automotive and Industrials practice. “It’s probably not the same as in the past,” he said.
Hearsch said automakers are running somewhat lean because they don’t have the parts to make cars. “Where you will start to see these signs of trouble is where people will start to cancel these long-term orders,” Hearsch said.
Douglas says Avis is operating conservatively to prepare for a downturn.
“There will be a time when customers say, ‘Hey, I can’t do this right now,'” Douglas said.
But right now, there continues to be high demand from customers like Lee and his wife.
“She loves the Bronco. She’s willing to wait. I don’t know if I’m willing to wait,” Lee said.
It is important to keep perspective. Industry leaders are loaded – optimistic about the long-term future – even if there are short-term challenges.