Yesterday, the auto firms released their February sales numbers. The results were very strong, at least relative to the recent trend. The annualized rate was 13.4 million, well above the 12.6 million rate in January, and 27.3% above the year-ago level.
The rate is still far below what was considered normal before the Great Recession, when annual rates with 16 or even an occasional 17 “handle” were common. Still, it was the highest rate since August 2008, with the exception of the Cash for Clunkers fueled spike in August 2009. See the chart below (from this source).
This is clearly good news for the auto industry. General Motors (GM), a company that the U.S. taxpayer still owns more than a third of saw its sales increase by 46.4% year over year. Ford (F) did not fare quite as well, posting just a 13.7% year-over-year increase. Chrysler also lagged a bit with a 12.6% gain.
Both GM and Ford posted very strong profits in the fourth quarter, with Ford earning $1.19 billion before non-recurring items, and GM posting $1.81 billion. While I don’t think they will get there anytime soon, just think of the sort of money that these firms could be making if sales were to recover to the 16 million plus rate of a few years ago.
Not bad for an industry that just two years ago was on death’s door. If the government had not stepped in to help with GM’s prepackaged bankruptcy, the firm would have probably been dismantled, and would still be under court supervision.
That would have hurt not just direct employment at GM, but also at its dealers and parts suppliers as well. Many of the parts makers would no longer have been viable and would have shut down. Ford, which did not go into bankruptcy, would have been hurt by that, as they rely on many of the same suppliers.
It now looks like the direct cost to the government of the GM bailout will be minimal, and that the government might even end up making a small profit on the deal. If GM were just allowed to go under, the loss of jobs would have further suppressed tax revenues. That would have made the budget deficit much worse than it is now.
Long-Term Concerns?
While the overall rebound in sales is encouraging — both as a sign that the economy is coming back due to higher consumer confidence and as an actual cause of further economic growth — the make up of the sales is a reason for long-term concern. While total sales were up 27.3% year over year, car sales were only up 23.1% while sales of light trucks, such as pick-ups and SUVs were up 31.7%. In the short term that’s great for the companies, since they earn much heftier profit margins on trucks than they do on cars.
In the long run, though, it means that the country is going to be importing more oil, and thus running a massive trade deficit. The trade deficit is what is directly responsible for the increase in U.S. indebtedness to the rest of the world, the budget deficit at best contributes to it indirectly.
The trade deficit is like a cancer eating away at our economy. It is, in my opinion, a far more serious economic problem than the budget deficit, particularly over the next few years. Every dollar of the trade deficit directly lowers GDP. A falling trade deficit (even if still large) can be a very powerful contributor to GDP growth, and with it, employment gains.
It also puts upward pressure on overall world demand for oil thus keeping oil prices high (clearly not the only factor, but at the margin). Oil accounts for over half of our trade deficit, and is one area where a weaker dollar will not help resolve it. The mix shift towards light trucks was especially large at GM and Chrysler.
Sales of the Chevy Silverado jumped by 60.1% from a year ago, and sales of Dodge Ram pick up trucks soared by 81.6%. That will be very nice for the margins of those two firms, but they are still amongst the least fuel efficient vehicles on the road (although better than they used to be). On the plus side, however, pick-up trucks are often bought by small businesses, so the surge in sales might be an indication that small businesses might be recovering and will start to add to employment.
Today, ADP estimated that small businesses added 100,000 jobs in February, although their estimates have been significantly too optimistic for the last two months. We will see on Friday if that was the case again in February.
Natural Gas-Powered Vehicles?
Both Ford and GM make natural gas (NG) powered vehicles, they just don’t sell them here in the U.S. The technology is well established. The problem is a lack of refueling locations. Since we already have a great distribution network for natural gas it should not be too difficult to establish such refueling stations. Heck, it might even be possible to sell the gear to individuals to refuel NG powered cars at home. In fact, most people already have NG service for home heating.
Making such devices small, cheap and safe enough for home garage use might take a little doing, but U.S. industry should be up to that engineering challenge. However, gas stations are not going to start installing NG refueling systems while there are few if any NG vehicles on the road. People are not going to start buying large numbers of NG powered cars if there is nowhere to fill up. Talk about a chicken and egg situation.
The benefits of moving that direction though would be huge. At current prices, NG is selling for the equivalent of just $22.86 a barrel, or less than a quarter of the price of oil. While if NG powered vehicles became common, it is likely the price of NG would move up, that is still a huge gap to fill. The gap could also be filled the other way, as lower U.S. demand for oil results in lower oil prices (more likely a combination of the two).
Furthermore, the U.S. is self-sufficient in NG, and has massive reserves. To the extent we import it, we import it from Canada. Given how tightly intertwined our economy is with that of Canada, importing stuff from there worries me less (not zero, but less) than from other parts of the globe.
In addition, moving to NG powered transportation would pay other dividends. NG releases about one third less CO2 than does oil, and about half as much as coal. Clean coal is sort of like a kosher ham and cheese sandwich. Coal however, is not used for transportation, except indirectly to the extent we go towards electric powered vehicles and the power is generated from coal. Roughly half of all U.S. emissions of CO2 come from the tail pipe.
Thus we could substantially reduce the country’s CO2 footprint by moving in the direction of NG powered vehicles. Even if you don’t believe in human-caused global climate change (I do, and I think the evidence is very compelling) there are more than enough economic and national security reasons to move in this direction.
Clearly some of the biggest winners of this would be the natural gas-oriented E&P companies like Chesapeake (CHK) and EnCana (ECA), but the winners would also include all the people getting royalty payments from their lands that sit over the big shale gas reserves. That money would circulate inside the U.S. rather than flowing to Saudi Arabia, Venezuela and Nigeria.
Government Investment?
Government spending to break the chicken and egg dilemma would pay massive dividends. Those dividends would continue for years and years to come. Government spending that produces a large return on investment is not a bad thing, and yes it does happen. Perhaps not as often as private investment producing a large positive return on investment, but it does happen.
Keep in mind that the government does not keep the entire benefit or any positive returns its investments make. For example, the revenue-maximizing toll levels on the Hudson River crossings between New York and New Jersey are probably much higher than the current toll rates.
In other words, if they were doubled, traffic across them might start to fall, but it would not be cut in half. Thus, motorists are capturing some of the return on the investment of building the Holland Tunnel and the G.W. Bridge, rather than just not making the trip, or driving north a few hundred miles to go around the river. Perhaps a private ferry would be created to compete, but I still doubt traffic over the crossings would fall in half.
CHESAPEAKE ENGY (CHK): Free Stock Analysis Report
ENCANA CORP (ECA): Free Stock Analysis Report
FORD MOTOR CO (F): Free Stock Analysis Report
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