After the Bubble

With a massive restructuring of the U.S. auto industry under way, there is an important point to consider: Just how many cars can Americans be expected to buy in a post-bubble economy?

Uncertainty reigns on that question, just as it does in the broader consumer economy about whether the housing collapse and the subsequent deep recession - the worst since 1973 - will result in lasting changes in spending habits.

Diane Swonk, an economist who spoke in Philadelphia Thursday, said she believed the consumer world would never be the same.

"We are going to see an economy that is much less dominated by consumption," said Swonk, chief economist at Mesirow Financial Holdings Inc., of Chicago. "It's going to be painful."

If Swonk, whose father was a Detroit auto-industry executive, is right, there are serious implications for the Big Three automakers, whether they restructure through bankruptcy, as Chrysler L.L.C. is trying to do, or otherwise.

They have to get smaller not just because of their steady loss of market share to carmakers from Japan, South Korea, and elsewhere, but also because the overall market is not expected to be as big as it was during the housing boom.

U.S. auto sales averaged 16.7 million a year from 1998 through 2007, according to Ward's AutoInfoBank. As the economy sank into recession last year, they fell 21 percent, to 13.2 million. Economists are forecasting sales of 10.5 million this year.

And there is little hope that annual sales will get close to or eclipse their peak of 17 million - a level reached four times since 2000 - any time soon, economists said.

"That 17 million was never real," said Gary Dilts, senior vice president of global automotive at J.D. Power & Associates, of Westlake Village, Calif. That figure was inflated by a million excess rental cars and a million purchases spurred by automakers' special deals, Dilts said.

Mark Zandi, chief economist at Moody's Economy.com in West Chester, said it would take until the middle of next year to work off the effect of purchases that were made early, before buyers really needed new cars. Zandi called that "spent-up demand," as opposed to pent-up demand.

Some economists said car sales also benefited from the overall era of easy credit and low interest rates, which allowed real estate prices to soar and added $6.5 trillion to consumer wealth between mid-1997 and mid-2006, according to the Congressional Budget Office.

That boom - along with the frequent tapping of home equity for cash through refinancing - added hundreds of billions a year to consumer spending, the budget office said.

During that decade-long, debt-enabled shopping spree, Americans added about one car per household, according to a March report on the projected size of the post-recession U.S. vehicle market by Jeff Rubin and Meny Grauman of CIBC World Markets Inc.

Rubin and Grauman argued that the evaporation of easy credit and a return to higher gasoline prices would force annual vehicle sales down to the range of eight million to nine million, with vehicle-ownership rates falling back to levels last seen in the 1980s.

The more widely held view is that this year's projected sales of 10 million will be the bottom. General Motors Corp. based the break-even point in the restructuring plan it presented last week on U.S. vehicle sales of 10 million a year.

Over several years, economists expect auto sales to return to a healthy level of 15 million a year.

For one thing, Americans are sending cars to the junkyard at an unheard-of rate of 13 million a year, Dilts said. "Right now, we are scrapping almost three million more vehicles than we're building," he said.

Economists do not expect that trend to last.

Population trends also point to a turnaround for auto sales. Dilts said the number of licensed drivers in the United States was projected to increase one million a year for the next five years.

John Wolkonowicz, senior auto analyst at IHS Global Insight Inc., of Lexington, Mass., sees another demographic reason for optimism.

The oldest members of the so-called Generation Y - children of the baby boomers - are turning 31 this year. In their 20s, they did not buy many new cars, he said, but in their 30s they will start to earn good salaries and will head to new-car lots in droves.

"The arrival of Gen Y in the marketplace bodes well," Wolkonowicz said. "It's the leading edge of that generation that's going to help propel the auto recovery."