September 01, 2004

Urrrkkk!

This is not good:

WSJ.com - GM, Ford Plan Cuts in Production: In moves that could slow the Midwest manufacturing economy -- particularly in election-year battleground states such as Michigan and Ohio -- the two titans of the U.S. auto industry, General Motors Corp. and Ford Motor Co., said they will cut fourth-quarter vehicle production. The announcement followed a disappointing August for auto makers, which saw American consumers steer clear of large, fuel-chugging sport-utility vehicles as oil prices surged. Sales of GM's big Chevrolet Suburban SUV fell 38%, amid a decline of 14% in overall sales, and Ford's large Expedition SUV slumped by 23%, despite discounts of as much as $6,000 per vehicle, amid a 13% decline in overall sales....

But the decision to ratchet back production is a significant step, because the auto makers play a huge role in the country's manufacturing economy. GM said it will cut production at its North American factories by about 7% during the fourth quarter in response to slowing sales. Ford said it will cut North American production by nearly 8%.

Posted by DeLong at September 1, 2004 08:12 PM | TrackBack
Comments

Look at the bright side. We're all breathing a little easier without those pollution spewing SUV's on the road.

Posted by: Dubblblind at September 1, 2004 08:27 PM

I was going to say that a decrease in SUV sales is a good thing. Hopefully, it will stick well pass the change of guard come November 2nd.

But then, I'm not an economist. I lost most of my brain cells trying to be an electrician of a nuclear powered submarine. Do you know how many different equations are used in figuring out the shape of a nuclear reactors core? More then I can remember.

Oh, sorry. Got off topic. That happens to me a lot. Here, let me shake my head, see if the last two connect.......

Nope. No go. Guess I'll leave now.

Posted by: Rook at September 1, 2004 08:43 PM

Don't be an economic girlie man Brad.

Posted by: Kuas at September 1, 2004 08:50 PM

OK, so this doesn't sound promising, but I think Daimler-Chrysler has been doing fairly well so far, albeit not so well that they can reverse a 7-8% cut at Ford and GM. So is there any conventional wisdom on what this should do to 4th quarter GDP? Is it as large as -1% by itself?

Fortunately, our housing bubble is still intact. The really scary news would be that housing prices in LA and NY were unchanged from month-to-month.

Posted by: Jonathan King at September 1, 2004 08:51 PM

I'm very happy to see this decline in big SUV sales.

Sure, it could be bad for the US economy in the short term, but over the long term it is a good idea to reduce gasoline and oil consumption.

If no-one stops buying SUVs, the big US automakers will have no motivation to switch to manufacturing fuel-efficient vehicles.

And, a well-timed short term hit to the economy could have a nice negative effect on Bush's re-election prospects.

Posted by: MonbiotFan at September 1, 2004 10:22 PM

I was going to joke that the anti-SUV crowd is cheering, but y'all beat me to it. And apparently some of 'em really are cheering.

(Full disclosure: I drive an extended cab Ford Ranger - a girlie-man pickup truck, not a SUV. What kind of Republican am I?)

Posted by: Alan K. Henderson at September 1, 2004 10:25 PM

I'm very happy about SUVs not selling. I ride my bicycle to work every day like a girly man. And I don't even have a beer belly like the real macho guys. The fewer SUVs out there, the safer I'll be.

But isn't strange that according to economics, if more of us rode our bikes and spent less money on SUVs and heart bypass surgeries because we were healthier, the economy would be worse off because we're not consuming? What sort of logic is that?!!

Posted by: Piaw Na at September 1, 2004 11:12 PM

So exactly what happened in the calculation of SUV production from GM and Ford? Did the exports do them in or was it an across-the-board decline? If it was a general decline, does that mean that SUV owners are holding onto their old SUV or are they switching to something completely different (Primus)?

The entire auto industry is not healthy, but this segment of it was the one bright spot catering to the wealthy. As fewer and fewer of us have more and more, does it show up here: sales of Mercedes SUVs were fine but the standard GM SUV sales sagged? Did they just blow it badly with the sinking number of qualified customers or have those customers just left?
Maybe folks are just waiting and those vehicles will be sold after the election is over.

Posted by: calmo at September 1, 2004 11:36 PM

The Decline of the SUV, with its ridiculous markup, is a good thing.

What boggles me is that GM and Ford are responsible for some of the best small cars in the world. It's just that they don't sell them in the US. I don't have a WSJ subscription, so can't see the whole story, but it'd be interesting to compare non-US sales with those to the domestic market.

So it's not that GM and Ford aren't innovating; it's just that they don't think that Americans should get to see their innovations. Or rather, that they lazily presumed that people would continue to buy bastardized pickups.

Posted by: nick at September 1, 2004 11:46 PM

Someone helped me out, so I now get to see that, alas, Europeans are being bitten by the SUV bug:

http://online.wsj.com/article/0,,SB109404604510106828,00.html?mod=home_whats_news_europe

Posted by: nick at September 1, 2004 11:48 PM

"But isn't strange that according to economics, if more of us rode our bikes and spent less money on SUVs and heart bypass surgeries because we were healthier, the economy would be worse off because we're not consuming? What sort of logic is that?!!"

Err no, if we didn't spend money on SUV's and Heart Surgery then we would spend it on something else. The economy would be no worse off, there would just be a shift from one set of goods to another.

I for one would be happy to see such a shift :)

Posted by: Rob Sperry at September 2, 2004 12:08 AM

I fail to see the line from Piaw Na's statement to Rob's.

How does one take into account that a person may be satisfied with the amount of their possessions, and therefore enjoy a condition of needing to purchase no more products?

Is that condition not expressed in a dependent variable anywhere?

D

Posted by: Dano at September 2, 2004 12:32 AM

Dano,

"How does one take into account that a person may be satisfied with the amount of their possessions, and therefore enjoy a condition of needing to purchase no more products?"

I am stipulating that people will switch from spending on one good to another. That other good might be leisure, and the trade might be to work less, now that you dont have to support the SUV habit.

Its true if you made that trade then GNP and the IRS won't count it. But economic theory certainly can, the math is the same.

But more broadly, I dont think that is very likely. I am not aware of any wide spread culture that has voluntarily reversed the growth in thier demand for goods and services for an extended period of time. And I certainl wouldn't leap from high gas prices resulting in lower SUV sales, to a broad based drop in consumer demand for material goods.

Posted by: Rob Sperry at September 2, 2004 01:29 AM

What about Hummers?

Posted by: ogmb at September 2, 2004 01:36 AM

"OK, so this doesn't sound promising, but I think Daimler-Chrysler has been doing fairly well so far, albeit not so well that they can reverse a 7-8% cut at Ford and GM."

D-C is treading water. Honda, on the other hand, is Ohio's biggest auto manufacturer and is enjoying record sales despite living up to its history of few financial incentives.

"Fortunately, our housing bubble is still intact."

That's not fortunate. Many wealthy people are avoiding the markets and buying real estate (2nd, 3rd+ houses) as investments, keeping housing prices inflated and out of reach of middle-class wage-earners. I've seen it in Boston, where the homeless (working!) population has exploded while luxury condos lie unoccupied. It's like "The Grapes of Wrath" with shelter instead of food.

"If no-one stops buying SUVs, the big US automakers will have no motivation to switch to manufacturing fuel-efficient vehicles."

They won't switch anyway. First off, the Big Three's modus operandi is to blame the unions and/or the Japanese. Second, SUV's are cash cows. In terms of value, a luxury SUV is like a burger sold at filet mignon price (which is why SUV's are marketed so heavily). Even with that $6000 discount, Ford's still turning a healthy profit.

"How does one take into account that a person may be satisfied with the amount of their possessions, and therefore enjoy a condition of needing to purchase no more products? Is that condition not expressed in a dependent variable anywhere?"

Yeah, it's called wealth. We had a problem like that in the 90's, I think, but Bush took care of it.

Posted by: Dragonchild at September 2, 2004 02:02 AM

"Yeah, it's called wealth. We had a problem like that in the 90's, I think, but Bush took care of it."

"Our long national nightmare of peace and prosperity is over."
- Onion parody of GWB's inauguration speech, 1/18/01

Those production cutbacks should have a serious ripple effect. While a lot of what goes into a Ford or GM vehicle gets manufactured abroad, a lot of it is manufactured in the Midwest, too.

Posted by: RT at September 2, 2004 04:18 AM

Rob,

Thanks for doing the job on demand shifting. If the debate continues, give out with the shift of resources => short-term pullback from PPF, then return to PPF at some other point. It's usual a crowd pleaser.

Posted by: kharris at September 2, 2004 04:24 AM

Nick,

"with its ridiculous markup" I am curious as to what is and who determines a "ridiculous markup"? I read this monring that Starbucks is raising prices but coffee is only 5% of the cost of a cup of coffee. Is that a ridiculus markup?

ps I HATE SUVs, don't own, and wish they would ALL disappear.

Posted by: me at September 2, 2004 06:46 AM

To other non-economists: I looked up the "PPF" acronym kharris used above. It can mean parent permission form, per pupil funding, or price per foot. See, who said this economics-speak was hard to follow?

Posted by: tedb at September 2, 2004 06:54 AM

Ford and GM don't make money building cars. They make money building trucks and SUVs. Back in the late 90's, Ford's Michigan Truck Plant ran three shifts and produced Ford Expeditions and Lincoln Navigators. This plant was responsible for two thirds of Ford's profits from its worldwide operations. The profits from 33 months of this plant's output paid for Ford's purchase of Volvo. I remember telling my wife "Ford's in trouble" after reading they had to cut one shift at the plant. In the years that followed, Ford lost billions.

Personally I think SUV's are an egregious waste; but they have kept a lot of people employed. The fear has been that if Ford and GM could not maintain sales momentum and were forced to cut production that this would lead to the bankruptcy of many of their suppliers.

Brad is right. This is not good.

Posted by: Nelson at September 2, 2004 07:00 AM

tedb,

Jargon points off for me. "Production possibility frontier", but by now, you probably knew that.

Posted by: kharris at September 2, 2004 07:50 AM

I've been driving a rented Pontiac for the last five days, and that's been enough to make me think that in the long run, the best thing for everyone would be for GM to cease production altogether.

Posted by: David Moles at September 2, 2004 08:59 AM

Retail sales were weak again for the third month in August. Worker productivity for the spring quarter showed slowing. The economy is slowing, and I have no sense this is a brief patch that will quickly lead to faster growth.

Posted by: anne at September 2, 2004 09:24 AM

http://www.nytimes.com/2004/09/02/business/02scene.html

Wal-Mart and Productivity
By JEFF MADRICK

ON this Labor Day, it is worth remembering how widely it was once argued that America's new economy would produce more democratic workplaces that depended on the advancing skills of workers. Old assembly-line mass production was dead, hierarchical management was a dinosaur, and the nation's productivity would be raised rapidly through the creation of interesting new jobs at higher pay and benefits.

But the new economy, it appears, can cut two ways. New technologies can be used to create good jobs, but they can also be used to create stultifying and poorly paid ones. In fact, the latter possibility, more than outsourcing or globalization, may account for why the nation's productivity has been rising recently while real wages are stagnating and job creation is well behind the pace of past recoveries.

To the historian Nelson Lichtenstein, who teaches at the University of California, Santa Barbara, one way to think about how the economy has changed is that Wal-Mart Stores, a services company, is the classic "business template" of the contemporary economy.

It is the nation's largest company, representing 2.3 percent of the gross domestic product and employing 1.5 million workers. Its prowess and buying power are breathtaking: it is the largest trucker in the nation, the third-largest pharmacy, one of the nation's largest grocers, and its overall sales are greater than those of Target, Sears, Kmart, J. C. Penney, Safeway and Kroger combined. Microsoft and Intel sales are a tenth as large.

Moreover, it is a remarkably innovative exploiter of the latest technologies, enabling it to run its huge retail network highly productively, and providing its 20 million or so daily customers both low prices and a wide variety of products. The economists Barry Bosworth and Jack E. Triplett of the Brookings Institution find in a new book, "Productivity in the U.S. Services Sector" (Brookings Institution Press), that retailing in general has contributed substantially to the nation's productivity boom since the mid-1990's. And Wal-Mart is the industry leader.

By contrast, Mr. Lichtenstein says, in the 1950's, General Motors was clearly the nation's business template. G.M. was the largest company in America, its revenues making up 3 percent of G.D.P. And G.M. was highly productive, meaning high output per hour of work, just as Wal-Mart is now.

But here is the critical difference. The manufacturing company paid high and rising wages, setting a pattern for the rest of the nation. Unlike G.M., Wal-Mart is not producing high-paying jobs, even by the standards of the retailing industry. Critics are compiling evidence that Wal-Mart's success, while entrenched in the brilliant management of new technologies, is dependent on low labor costs. And the low-wage business model is setting a pattern for others.

As James Hoopes, a professor of business ethics at Babson College, puts it, the new technologies enable Wal-Mart to manage its labor from the top down in ways that Frederick Winslow Taylor, the classic managerial efficiency expert of the first mass-production era, could only dream about. Just as it closely manages its inventory and purchases, Wal-Mart's central management deploys its employees and minimizes their hours.

Mr. Hoopes says that because it does not work face to face with employees, top management may not even fully understand what is going on. But academic researchers interviewing Wal-Mart employees find frequent complaints about stress and overwork and little respect for personal needs. And a recent gender-discrimination class-action suit has attracted wide attention.

Posted by: anne at September 2, 2004 09:29 AM

Anne is right, declining SUV sales are a blip on the horizon compared to the Wal-Martization of America. And for those who think WalMart is an anomoly that won't affect them, here:

Professional careers used to have status, good pay, benefits, even pensions, but began in the late 1990's to suffer from downsizing, temping and outsourcing.

By the Y2K economic crash, I was reduced to working on-call to three service agencies, at 2/3rd's wages, part-time, and zero benefits.

We joked, old-timers, about kids getting out of college, calling up our W-1099 "companies" and asking to work ... for free, just for the work experience towards their professional "career".

So the old passes away to make room for the new.

If it's not building SUV's, or airplanes, it'll be something else. Aerospace and tanks, maybe?

Posted by: Harry Possue at September 2, 2004 11:26 AM

Hilarious. If Bush's cocaine-pitted brain were functional, he would have proposed in 2001 a tax cut that was proportional to the amount of gas you burned rather than one that lets only rich Republican trial lawyers buy monster SUVs. Idiot.

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I have a feeling the Southern Good Ole Boys, Clinton, Bush, Miller, and Wal-Mart, are on their way out. I am ready with my pitchfork and torch to join the masses in protest. A new Boston Tea Party may be in order, I'm thinking.

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