Automobile Industry Impact on US Economy and Consumer Responses

The automotive industry bailout was announced by the White House and U.S. Treasury on December 19th, 2008.  The US Government plans to provide $17.4 billion to U.S. automakers in short-term loans to give these manufacturers time to restructure. How these loans will impact the US economy, if they will work positively for the US economy and if the big three can be saved remains to be seen. In the meantime, the threat of bankruptcy and the need for a bailout has affected many auto dealers and consumers.

Short Term Impact: One of the Best Times to Purchase a New Car

After the huge increases in gas prices earlier this year, gas guzzling SUV and truck sales were hit and prices began to be slashed. Now, with the year end, we have the expected deals from the auto industry on 2008 models as new inventory rolls in. Add to that the desperate need for both the automotive industry and many private dealers to move autos off their lots; there has never been a better time  for US consumers to get a great deal on a new car.
Auto rebates are very much an integral part of the new car shopping process, hovering in the $3,000-$4,000 range in recent years, even without employee discount promotions which are now offered more freely. Between rebates and incentives such as 0% financing, red tag events, and cash back, Consumer Reports listed in November  over 70 new automobiles that have current price tags up to 25% off the typical MSRP and this list will grow. In normal economic times, consumers would be flooding to the lots and buying up new cars like crazy.

Sadly, these are not typical economic times for either the US economy or consumers.

The freeze in the credit industry has impacted the US economy making it difficult for many consumers to obtain financing for new cars.

While it is said that there is still money out there to lend, the stipulation is that consumers must have and maintain good credit. Many banks and lenders have tightened their requirements in giving loans, leaving many of those individuals with checkered credit histories and labeled as possible risks with little to no recourse in obtaining funding. People with good credit can still find money, but there is the general hesitation to incur more debt with the US economic and employment uncertainties, so they are holding tight as well.
Hence, the credit freeze alone has impacted the automobile industry with a marked decrease in new car sales and the industry fallout that comes with such a tight purchasing  US economy. Nationwide, 590 new-car dealerships have closed so far this year, according to the National Automobile Dealer Association. This in turn creates more unemployment, less money in terms of spending power, and more crisis and uncertainty.

The idea of the major automobile industries declaring bankruptcy raises a lot of negative connotations to many consumers.

Cars are a customer’s second-biggest purchase after purchasing a new home. Buying a car is creating a long-term commitment with that company and few buyers would gamble on a bankrupt manufacturer even with reduced price tags and rebates.
Buying from a questionable automotive manufacture raises many questions and legitimate concerns from the status of ones warrantee to the ability to obtain parts and services for car repairs through the years. As people plan on keeping a new car quite some time, they desire a car manufacturer that will be there with them for the long haul of their relationship. It goes without saying that testifying before Congress that the Big 3 will have to shut down by March of ’09 does little to reassure folks that they will have what they need to support their car purchase in the years to come.

Trickle down US economy impacts those at the bottom.

Aside from the “big three” automotive industry CEO’s asking for bailouts, local dealerships closing doors, employees out of work, the overall freeze of car purchases impacting the economy as a whole, the current consumer responses have decreased the availability of used cars on the market. If consumers are not buying new cars, then they holding on to their older cars longer and less used cars are available as well.

The used car market was a frequent source of automobiles for consumers who wished to or could not incur the larger pricing and debt of a new car. Even on the small scale, the credit freeze imapcts these consumers and decreases the available opportunities while the decrease in new car purchasing decreases the selections of used cars as well.

Does the American automobile industry bailout equal light at the end of the tunnel for the US economy?

The National Automobile Dealers Association’s chairman Annette Sykora responded to the bailout announcement: “This is the first step toward restoring consumer confidence,” Sykora said in a written statement.

“When you have the government declaring its confidence and commitment to U.S. auto manufacturers, it helps reassure the American public that domestic automakers will be around for the long term,” Sykora said. “This sends a clear message: Consumers can now consider any car from any manufacturer with confidence.”
We will have to wait and see if that really trickles down as well.