ANALYSIS: Fiscal cliff risks are on auto industry radar
Ford CEO Alan Mulally was among a delegation of US corporate heads meeting with President Obama to discuss the federal deficit this week
The dangers for the US economy posed by the so-called 'fiscal cliff' of tax rises and spending cuts if agreement is not reached on closing the yawning federal budget deficit, are now causing concern among automakers.
Failure to reach an agreement could tip the US economy into recession in 2013, commentators say. While the smart money is on a deal being done in time, agreement between the President and (Republican led) Congress is yet to be reached. If it is not reached by the end of the year, automatic tax rises and spending cuts worth US$600bn will be triggered from January 1. The 'cliff' is supposed to act as an incentive to reach consensus, however difficult (and it is), and help focus minds on getting budgetary agreement by the end of this year.
Ben Bernanke, the chairman of the US Federal Reserve, has warned in a speech this week that the fiscal cliff poses a "substantial threat" to the US economic recovery.
The possible consequences for the US economy are now also beginning to provide concern to the auto industry in the US, which is continuing to enjoy recovering volume and profitability despite a relatively weak US economy.
A number of executives have recently voiced their concerns, including Bill Ford and Fiat-Chrysler CEO Sergio Marchionne. Ford noted that it is “vitally important for the economy that we work this out" and Marchionne admitted that he has been following the issue with “much anxiety”.
However, Lacey Plache, chief economist at Edmunds, sees compromise ahead. The “good news,” she says, “is that even the experts assign a low probability to the government doing nothing about these potential fiscal changes. The more likely compromise scenarios involve more limited tax hikes and spending cuts and, as such would have a more limited economic impact, including on car sales in 2013.”
Edmunds forecasts a 15m unit light vehicle car market for the US in 2013 and sees limited risk to that forecast.
Plache notes that President Obama ran on a platform of raising taxes and has strongly supported letting the Bush-era tax cuts expire for relatively affluent individuals. But she says that such tax increases would affect only about 4-5% of car buyers and these wealthy buyers would be less likely to not make car purchases.
Another potential tax rate change identified by Plache is the failure to extend the Alternative Minimum Tax (AMT) patch for inflation. She says that would affect nearly 30m Americans in the prime car-buying income brackets and is therefore “unlikely to happen since both Democrats and Republicans have traditionally supported the patch”.
The one likely tax change that would affect the majority of car buyers is the elimination of the 2% payroll tax cut, but this cut was always in place as a temporary measure for one year and as such was not likely to have been spent on new car payments expected to last three years on average.
Plache says that the likely tax rate changes should not substantially lower car sales in the near term. In the longer run, though, she cautions that the growth of car sales could slow if higher tax rates for the "wealthy" result in enough less spending and investment that job cuts result.
As far as federal spending goes, the likely impacts for car demand are also limited. The spending cuts appear to be less at risk for going into effect than the tax increases, Plache notes. “President Obama has said that he would oppose the US$55bn in defence spending cuts, for one, and he is unlikely to support any cuts that result in significant job reductions,” she maintains. The one likely spending cut she identifies, the end of extended unemployment benefits, should not directly affect car buyers since the vast majority of recipients are unlikely to be buying new cars.
Edmunds.com forecasts US sales of 15m light vehicles in 2013, an increase of 4% over the 14.4m total expected in 2012. Economic uncertainty due to unresolved fiscal issues at home and (actual and feared) spillover effects from slowing economies abroad will continue to slow the pace of American economic growth, including car sales, Edmunds says. But Edmunds also says that many of the same factors in play now will still support car sales momentum in 2013. It says the release of pent-up demand from buyers who deferred sales during the recession will intensify as credit conditions further loosen and the increasingly aged fleet drives more consumers back to the new car market.
Edmunds also points out that sales will receive a boost in 2013 from an expected nearly 500,000 additional lease returners compared to 2012, who will lease or buy a new vehicle when their current leases terminate.
But top level auto industry eyes are sure to be on the federal budget negotiations ahead. The US light vehicle market recovery since 2009 has raised volumes on lean cost bases for a big profitability boost. Moreover, it has been an upbeat story that has helped to counter bottom line negatives elsewhere in the world (notably Europe). Bill Ford sums up the prevailing feeling right now: “There seems to be good will on both sides to get it done,” he told reporters this week. “But Ford is not isolated from what happens to the rest of the economy.”