U.S. light-vehicle sales for July were the highest of any month in history.
Automotive News reported record-breaking U.S. auto sales for July:
Ford Motor Co. and the Chrysler group joined General Motors in selling vehicles below dealer cost. Sales of Ford’s North American brands jumped 30.5 percent over last year….In the second month of the GM Employee Discount for Everyone, sales of GM’s North American brands climbed 14.7 percent. In June, the kickoff month, GM posted a gain of 46.7 percent….
GM’s cars were down 5.4 percent, and its trucks were up 27.6 percent; Ford Motor’s cars were up 22.0 percent, and its trucks were up 33.6 percent; the Chrysler group’s cars were up 5.8 percent, and its trucks were up 34.2 percent….
The other Big 3– Toyota Motor Sales U.S.A. Inc., American Honda Motor Co. Inc. and Nissan North America Inc.– also did well in July, with a combined sales upswing of 10.3 percent.
And in a separate story:
For many dealers, the Big 3’s decision to extend employee-discount-for-all deals on 2005 models won’t mean much.
The reason? After the discounts set summer sales ablaze, there aren’t many 2005 vehicles left.
Chevrolet dealer Edgar McGraw normally has 120 vehicles from the outgoing model year on his Camden, Ala., lot in early August. This year he has fewer than 20, he says.
I guess Detroit can still sell plenty of cars as long as they don’t want to make a profit.
The strange thing is that it doesn’t seem like even record (nominal) prices for gas are encouraging people to buy higher mileage vehicles. From what I’ve read, SUVs sold especially well with all those special deals. Ford’s only hybrid, on the other hand, actually fell in sales.
There is a price elasticity of demand for everything. If a new SUV is cheap enough, that compensates for additional fuel costs.
There was some study somewhere that the falls in the prices of SUVs had more than compensated for gas price increases to date.
Here in the UK we have USD $6/gal gasoline, but people still buy SUV type vehicles (Land Rovers, Range Rovers and the likes of the Porsche Cayenne and the VW Touareg). But real vehicle prices have fallen c. 10% in the last 3 years (due to competition and the opening up of the EU car market) so the total cost of driving has not risen.
Gas is just not that big a part of the lifecycle cost of owning a car relative to insurance or depreciation.
Detroit will make cars as long as they cover the variable costs of production. As long as a car sells for more than parts + labour it will be sold.
It’s only when losses on fixed costs provoke exit that you see a reduction of capacity in the industry. Given the costs of crystallising pension and healthcare liabilies I don’t see that any time soon.
The problem with the Escape Hybrid sales was that it wasn’t included in the employee discount program. Way to go, Ford.
I think you have it the other way around. A manufacturer will keep manufacturing as long as they can cover the fixed cost. We’ll start to see reduction in capacity long before cars costs more than fixed costs.
JDH, great post today. It shows the what’s happening and everything that needs to be said is put in just one sentence “I guess Detroit can still sell plenty of cars as long as they don’t want to make a profit.” Spot on!
What will the Detroit’s follow-up act be?
With many vehicles almost unchanged between 05 and 06 model years, showrooms will be lonely places once “employee pricing” ends in Sept.
Don’t forget that cars are loss leaders for Detroit which makes most of its profit from its finance arms.
Last spring many economists were worried about a slow down in the economy. Now very few are. The irony is that there are more reasons to be worried now than there were five months ago. The real funds rate is comfortably above any measure of inflation, which means the increase in short rates should begin to have some bite. Layoffs have soared 40% from the average of the first 4 months of this year. Normally, layoffs decline 20% during the summer. Oil prices are slowing the world economy and will slow the US economy soon. The discount programs by Detroit have borrowed sales from future months and have provided manufacturing a short-term shot in the arm. Money supply growth has slowed appreciably in recent months. And finally, the very fact that a majority of economists are so sanguine about the next six months is another reason to become cautious.The first signs of this unexpected slowdown should begin to emerge in September, which will lead to a correction in the stock market.
Having been a sales manager at a General Motors dealership for 15 years I always look forward to wall street analysts and the automotive press reporting the inescapable demise of GM. These reports have always been followed by a tremendous surge in sales. June and July were indeed record months for our dealership. August will likely be far more tame, but don’t expect the sales hangover to last nearly as long as industry experts predict. GM always comes up with a new innovative marketing program when inventories swell. Most campaigns succeed despite all of the whimpering concerns about stealing business today from the future. Year after year it keeps happening. People like new cars and new deals!
Rick,
Good lord. On what planet do you live? I don’t know ANYBODY who owns a GM car (a few old Saturn owners traded in a while ago); the only thing you’re still selling into my demographic (35-year-olds) is pickup trucks, and that can’t continue forever in an era of expensive oil.
You guys missed the small car changeover in the 1970s, and you’re missing Round II now. I wish I could be smug in my Prius, but I know that as screwed up as you guys are, you can take a lot of our economy down with you.
Who owns General Motors, the Shareholders or the employee union members?
Others have suggested that GM in its current form exists primarily to serve up the generous benefits lavished upon active and retired union members.
GM may soon have to follow the lead of certain airlines in dealing with union contracts and obligations to their retired.
Response to M1EK
Well written, I laughed out loud. We actually sold completely out of cars and small sport utilities last month and have numerous full size trucks left over. You must exist in a pretty obscure little sphere if you don’t have any friends with a vehicle from the worlds largest automaker. Gary, don’t forget about the tremendous diversity of revenue sources for GM that don’t exist for the airlines. GM recently overtook VW as the #1 automaker in China, Europe just became profitable again after years of struggle, South American operations are going well, and GMAC is a profit making machine like few others. Revel in your ignorance while I reap the rewards from yet another outstanding GM sales campaign!
General motors reduces the size of its manufacturing capability every 20 years or so. And, whenever possible sells off as many vested pension people union or non-unions and high cost other benefits. This is just another cycle and when it is over GM will be smaller but financially sounder for another 20 years or so.
the problem for GM is that its market share has been steadily shrinking for over 30 years. The most dramatic drop has been in the passenger car segment but it is wrong to believe that the Japanese and other imports cannot catch up in the pickup truck and SUV segments.
AFAIK GM has consistently had a $1500/vehicle cost disadvantage against the likes of Toyota, which it never seems to overcome. It lowers costs and improves quality, and Toyota improves its by just enough to keep the gap.
More than anything, GM reminds me of British Leyland– once the largest car producer in Britain, and with the demise of Rover this year, now nonexistent. It took 40 years to die, though.
I suspect the end game is GM using Chapter 11 or the threat of to escape its pension and healthcare liabilities (the spinout of its parts subsidiary Delphi was an effort to achieve this, but it has failed largely).
The macro implication of that might be that it ends the current US healthcare system– if the largest single private user of healthcare reneges on its employee obligations, the whole integrity of the system must be in doubt.
Put it another way. GM in its current form is probably dying, but it will still be around in 20 years, with a lower market share.
There is always the chance of a revival (I gather Cadillac is having one, having been almost a dead brand 20 years ago). But GM’s competitors are faster moving, and that makes it very difficult.
First, thanks to the Professor for providing his writings and this board for discussion!
What I am struck with, when reading “Rick”‘s messages, is how well they correlate with what I have experienced in speaking with friends of mine over the years who have been car salesmen. To be a successful salesman one *has* to *believe*, in the product, themselves, whatever… To be full of doubts (as perhaps a monk of philosopher might be) will destroy one’s sales ability. I have experience this first hand when put into sales positions.
So Rick, the car sales manager, has to believe that GM will come through, meaning him and his sales staff will come through too.
This so poignantly gets to one of the real kernels of the problem at hand wrt PO. No matter what the geologists, or even some economists, may say about how close we are to oil becoming so scarce that we will face shortages, our modern society is built upon people acting on beliefs that (1) life will go on pretty much as it has, and, especially in the US, (2) if I believe and work hard enough I can become a ‘success’ (= material wealth.)
Dan
GM did not miss the small car market. It used the small car market for a selling platform into their large car market in the 1960-70-80-90-?.
They made their small cars unreliable, uncomfortable and noisy on purpose. They sold these to the first time car buyers with little money with the implicit statement when you could afford a good big car. You will receive a comfortable, quiet, safe and reliable ride.
This tactic let the Japanese sell their comfortable, quiet, and reliable little cars.
You may think that this is not true. But, I worked in the engine development labortories and the characteristic of a four cyclinder inline enine it needs a harmonic balancer. Without this, the engine simply vibrates to distruction in about 100,000 miles. This includes Saturn by the way. GM started including this feature in the 2000’s without any fanfare because they would have had to say we added this engine feature to improve the durability reliabilty and reduce the noisy little engines we built prior to this engine.
Many of you are asking why there is not a higher futures price for oil at this time. As a fulltime equity and futures trader who holds an MS in economics, I look at it this way.
In the real world traders work on perception, not economic rationality. Traders (and other market participants) also take time to assimilate new information, and to change their worldviews on something as complex as global supply/demand of oil.
I submit that what we are seeing now is a sowhat gradual perception change. People are slowly assimilating the work of writers like Matthew Simmons. They are seeing market tightness that now appears when a single offshore platform goes down, and beginning to wonder if this presages a change in longterm conditions. They are slowly dropping their complacency about Saudi “spare oil production capacity.” This is not the absorption of a single headline, it is a psychological process. Many oil executives feel shell shocked, still, I would guess, by the oil price drops of 1986 and 1998 — they are squeamish about committing capital to E&P. This is a somewhat gradual process, as the minds of market participants change one at a time, some faster than others.
Yes, in the financial world, some adjustments to news are instant, or at least rapid — viz, the stock price reaction to Shell’s reserve writedown. That’s what standard theory would predict. But some adjustments are not instantaneous.
Of course, if a major supply disruption hit Saudi Arabia, you can bet that the market would adjust much more rapidly. Absent that, what we are seeing is a more gradual process.
Jonathan
Very good point. One thing we do understand about people in financial markets is that their past experience conditions their expectations of future events.
For example, surveys show most Americans expect double digit annual returns from equities in the future, when this is impossible on any reasonable forecast. The same is true of housing prices.
Similarly it is likely that market participants in oil expect oil prices to revert to the mean: they always have historically.
The new information we might have is that there is such a thing as Peak Oil, and oil production *cannot* rise hugely above current levels.
GM Engineer
A very interesting bit of history and I hope someday this story gets out. GM never made any money in small cars, so of course they tried to get people not to buy them.
In Europe and Japan there are large domestic markets for small cars. If the companies were not profitable there in small cars, they would not exist, let alone be trying to sell such cars to Americans. So they learned how to make money in small cars.
As Toyota showed by putting its next plant in Canada, having the state take responsibility for worker healthcare and education helps a lot ;-).
Dr. Hamilton, and perhaps the rest of the economists:
You assume that once the price of oil becomes high enough, we will gradually switch to alternatives, correct?
Here’s my multi-disciplinary question: which alternatives do you see us switching to and how do you see it being implemented?
Jonathan, JDH pointed out an argument against interpreting today’s high prices as based on fears of future demand shortages. The problem is that the oil market is in a state of backwardization once you go out more than a year or so. Oil for delivery in 2007-2011 is selling for less than today. If people were starting to get the message from Simmons et al, wouldn’t we see more pressure on the long term contracts than on the ones for next month? It seems like the short term prices are dragging up the long term ones rather than vice versa as you might expect if Peak Oil fears were driving the market.
Another point I want to make as far as people still not buying high mileage vehicles. Again and again on the news this week we have seen weepy people at the gas stations complaining about the evil oil companies and how they can’t afford to put food in Junior’s mouth any more. What I’d love to see is a news report that juxtaposes such complaints with a visit to the new car dealer, where people are stepping into the latest SUV that gets 12 MPG. Ask those car purchasers why they don’t care that gas is $2.50. Ask the people at the gas station whether their next vehicle is going to be another gas guzzler or whether they’ll maybe get something a little smaller or with less power. In other words, put people on the spot and make them take responsibility for their actions.
I know it’ll never happen, this kind of thing doesn’t sell newspapers or TV time. People would rather see the sob stories and believe in conspiracies. But I can’t help thinking it would be good for people to have their noses rubbed in this inconsistency. Every story on high gas prices should be paired with a visit to the car dealer; every story on new peaks of SUV sales should be paired with a visit to the gas station. Put these two contradictory images together and I think it sends an instructive message.
albert:
“Here’s my multi-disciplinary question: which alternatives do you see us switching to and how do you see it being implemented?”
One I rarely see discussed is the use of superconductors to transmit, generate, and store electricity. This will get rid of a great deal of waste that currently occurs on the grid. Although prohibitively expensive at present, a good deal of effort is going into researching these systems and they could mitigate our power needs in the future. They could also allow us to efficiently store and distribute energy that we gained from alternative solutions, such as wind, solar, and tidal, that only provide energy on a limited basis or at certain times of day/night.
Another option I rarely see discussed is the use of ‘smart meters’, those which will be installed in the province of Ontario (Canada) within the next couple of years. These will smooth those miserable peaks that require excess capacity under current billing systems. At the current time there is no incentive to smooth out consumption during the day; using your dishwasher at 7PM or your air conditioner during the evening makes no difference to your wallet. If you were getting billed higher rates for energy use during peak periods you would try to mitigate this by using timers, doing laundry in the early morning/late at night, turning your air conditioner down during peak periods, etc. This would have a dramatic effect on energy use, in my opinion. I also wouldn’t be surprised to see the introduction of home energy storage devices, that would allow you to purchase energy in the middle of the night when it is cheapest, and use it during peak periods when it is most expensive. The technology exists, although it hasn’t been marketed to consumers because there is no incentive to buy it.
Although superconductors and smart metering are only two possible solutions, I think they could certainly play an important role within the next 10-15 years in the utility sector and in our homes.
HAL:
“Another point I want to make as far as people still not buying high mileage vehicles. Again and again on the news this week we have seen weepy people at the gas stations complaining about the evil oil companies and how they can’t afford to put food in Junior’s mouth any more. What I’d love to see is a news report that juxtaposes such complaints with a visit to the new car dealer, where people are stepping into the latest SUV that gets 12 MPG.”
I think the answer is that the price isn’t high enough yet. The embargo precipitated a drop in fuel consumption in the 70’s, and oil has just recently approached the real value that it achieved during that difficult time. The per-capita income, however, is still magnitudes higher now than it was back then, which means (if I’m allowed an extremely simplified extrapolation) that we’d need to see oil at $150-200 before we saw the same sort of pressure on incomes that it possessed at that time. I could be way wrong, but that’s how I’ve understood it.
Alright, I just realized the price history I was using included adjusted figures, and googling has given about 6 different values for the real price of a barrel of oil during the embargo. Anyone know what the ‘real’ unadjusted price of oil was during the embargo?
Nevermind, I think I found it. Nominal price $37/barrel, real price close to $95 in 2005 dollars for 1980. Does that sound about right.
Oh, and to not get too far off topic, I have to say that I smiled when I read Dr. Hamiltons quip:
“I guess Detroit can still sell plenty of cars as long as they don’t want to make a profit.”
It’s funny cause it’s true.
Playerslight:
I agree that such measures will help with the overall efficiency of electricity consumption in households, but remember that the problem we’re dealing with (in reference to this blog) is with reference to the transportation sector and Peak Oil.
Dr. Hamilton, I’m still waiting on your response.
Hey M1EK!
You sound like Pauline Kael – “How could Nixon have won? I didn’t know anyone who voted for him!”
So GM loses market share in an expanding market – so what? They still sell a lot of cars, many of them darn fine machines. They are begging for a Hillary win in 2008 so socialized medicine can take over their health care commitments.
As to cars, with the upturn in nuclear power’s fortunes last fall, I bought a new 2004 Pontiac GTO for the payments of a Honda Accord at 0%. I figured I would have plenty of doh-ra-me to afford the gas. BTW, it gets 19 mpg on the highway if I can keep it below 100 mph. I’m thinking of getting a bumper sticker “My Other Car is NOT a Prius!” The babes love it too – how impressive is taking a date on a bus?
If I don’t use the gasoline, some Chinaman will.
Nice, Joseph, nice.
Like James Kunstler would say: “Despite their lame attempts to rebuild a few pieces of the 2000-mile-long streetcar system that they gleefully destroyed in the 1950s, life here is all about cars and it will never not be about cars — until the reality of our oil predicament falls on the hapless public like a hammer of God and the people of California die for their *@! cars in their *@! cars and over their *@! cars.”
http://jameshowardkunstler.typepad.com/cluster*@!_nation/
[edited by JDH for family-value *@! filters]
“You must exist in a pretty obscure little sphere if you don’t have any friends with a vehicle from the worlds largest automaker.”
As I said, other than pickups (and I should have included SUVs), I don’t know anybody with a GM vehicle. And my circle isn’t ‘insular’; it’s more representative of the country at large than is Detroit.
Please stop drinking the Kool-Aid. I want you guys to compete with Honda and Toyota and make good small cars (like you BRIEFLY did during the early age of the Saturn experiment), because I want to get a quality American car that gets good mileage. You offer either/or, never both.
Hey Joseph,
‘You sound like Pauline Kael – “How could Nixon have won? I didn’t know anyone who voted for him!”‘
With the kind of reality-distortion field you apparently operate under, your opinions on nuclear power’s viability have suddenly come into sharp clear focus for me. Thanks for clarifying.
What brand vehicle are people on the coast buying? For several years now, foreign brands have outsold domestics by a wide margin.In the L.A. area one sees a few more mbs(i think it’s an image thing) whereas in the bay area it’s largely Japanese.Lots of people in the Lexus lane. If one has MB one is thought of as a little slow for paying more and getting less. My last Detroit effort cost me more in repairs than the otd price of the vehicle.Fool me once—.Now, I have a 300hp V8 and get 22mpg. No repairs.My dream came true.
Howard
You have hit on a key point. Gas is just not a big part of the cost of owning a car except for people who commute long distances or drive as part of their work (like sales reps).
The concept of a ‘domestic car’ is increasingly meaningless. Is a Ford made with Mexican parts more domestic than a Toyota assembled in Ontario? Or Tennessee?
The Japanese have lapped the Germans on quality and price/value. However German cars are still better driver’s cars, which is one reason why the Japanese have not been quite as successful here in Europe as they were in the US. (although they have made huge strides by providing stiffer suspensions, more precise steering etc.).
John – You are correct. Have a look at the AAA web site. They do a cost per mile calculation on new cars every year. Fuel is a very small part of total cost. Or look at it another way. That Hummer in front of you is burning up 20 cents in gasoline for every mile it travels. However, depreciation is probably running about a buck a mile.
Scott
I live in the UK. In your terms (and your smaller gallon 😉 a UK driver pays about $6/ gal (nearly 1 = $1.80 per litre, there are 4.5 litres in an Imperial gallon so I am guessing 3.8 in a US gallon?).
Still we drive big cars. Not as many as you, the average car is smaller and the average fuel economy about 10 mpg higher. But even so, you see plenty of Range Rovers, Porsche Cayennes, Land Rovers etc.
Diesel cars are about 44% of all cars sold here, so much so that there is a shortage of diesel fuel (the refineries are configured to produce more petrol per barrel and less diesel).
Despite all this, we still drive big cars, and we drive them fast: you can do 90 mph on a UK motorway and avoid a speeding ticket, mostly (legal max is 70).
Again the fall in the cost of cars over the last few years (as part of the EU opening up it is now possible to buy a right hand drive car in Belgium and drive it back, the same car can be as much as 40% cheaper) has offset the increase in fuel prices.
It now costs 8 to drive into Central London on a weekday, but the roads are still jammed every morning (parking costs c. 20/day).
Really fuel for most people is a small part of the total cost of car ownership (about 25% I think is the estimate here).
John,
Having spent some time working in England, allow me to say that you’re vastly exaggerating the number of ‘big’ vehicles there. I rented a Ford Escort one time (didn’t yet know how to drive a stick), and this was about 2/3 of the way up the size chart at the rental agency. This would be the smallest car you could rent in America, and whenever I try to rent one that size, I’m always the oddball.
I have yet to see a SUV in England (granted my last visit was in ’02). Not even a Range Rover, although I don’t doubt they must sell a few of those at home at least.
Around these parts (central Texas), > 50% of new vehicle sales are either pickup trucks or SUVs (even now with ‘high’ gas prices); which go so far beyond ‘big car’ as to be laughable.
So your statement that fuel cost isn’t much affecting vehicle choice in England seems to me to be quite clearly untrue.
M1EK
You must be very out of date. An Escort is about the smallest car you can get at a rental agency these days.
I looked out into our corporate car park when I read what you wrote. I can count in 100 cars at least 10 SUV class vehicles- Range Rovers, Land Rovers, Toyota Land Cruisers. And some very big conventional cars, minivans, estates (station wagons) etc. Granted this is the ‘posh’ south east, but in other parts of the UK you just see *older* Land Rovers, Range Rovers etc.
I agree Texas is something else ;-). My point was that high gas prices do not in and of themselves prevent people from buying big cars (or driving them with lead feet).
J.
John,
I rented the Escort in 1997; on my trip in 2002, somebody else did the driving. I noticed about 50% of the cars on the road being the size of the Escort or smaller – this was in an around Winchester (I was there working for about a month for IBM).
M1EK
Well you are out of date! The SUV plague has reached us here, too (albeit in a smaller more compact form)– it’s at least 10% of the cars on the road out there (if we count all 4WD utility vehicles). And of course there are vans.
(Ford no longer sells the Escort). The Escort was certainly always the smallest car you could rent at a rental agency.
I agree this isn’t Texas. (is any place)? where the numbers are more like 50% pickups and SUVs? And though I have seen the occasional Hummer, they aren’t common.
Overall, mpg of the UK fleet is about 12mpg higher than the US fleet, AFAIK. Which for a gas price which was almost 3 times as high, before recent price increases, is a measure of just how inelastic demand is to price.
The reality is even here petrol is not a big cost of owning the car: estimates are about 25% of the annual cost for a 10k mile/yr driver. They have tilted road tax to make it more carbon-emission based, but that is only another couple of hundred or so pa. And at the executive car end (the SUV owning classes one might say 😉 the company is paying for the car anyways.
John,
12mpg PLUS far fewer miles driven per capita per year. Don’t forget that part of the elasticity equation.
ME1K
Hey good news…We sold this morning a Cadillac CTS rated 27mpg, a Chevy Impala rated 30mpg, an Equinox rated 23 mpg, and a Suburban with a respectable 18mpg. Although these customers were doubtless not associates of yours, they uniformly concur that the General may yet survive and thrive! Dan, you make me feel so delusional. Perhaps the sky is falling. By the way GM is producing a full size hybrid truck this year…First one will arrive at our dealership in September. Any takers?
Rick,
Are you smoking crack? That hybrid truck GM is producing is a joke – one or two more MPG.
And those numbers you quote are highway mileage. I’ll take my 51 hwy / 60 city Prius over any of those cars, thanks.
I’ve driven your cars plenty over the last couple of years at rental agencies – you have a long ways to go. The Malibu Maxx was particularly bad. The Tahoe I got stuck with when we had the Prius at the dealer for scheduled service was the worst, though.
A Prius ME1K? I’m embarrassed for you. Sorry about the Malibu Maxx, those rental experiences can be a bit capricious! Do me a favor and try a CTS next time, I promise you’ll be impressed. I feel a bit unworthy commenting about oil pricing, supply peaks, and international demand, but the intriguing reading in some of the other threads makes me want to add one comment as a retailer. The rampant call for conservation is likely to fall on deaf ears for a while despite the high prices at the pump. Fear and uncertainty drive some hair trigger consumer responses (Trading an Avalanche for a Cobalt!) After consumers perceive some level of consistency, however, people adjust to the new costs and still drive what they want or feel they need.