Like farmers on drought-parched land scanning the horizon for a sign of rain, U.S. auto industry leaders have waited all year for an economic cloudburst of new car sales that would revive them from a deep, two-year-long slump.
They are still waiting, with no relief in sight. Two months ago, the auto companies predicted a strong recovery in June; but instead, domestic car sales fell to the lowest volume in 23 years for that month.
The explanations for the continuing drought are more psychological than economic, according to auto industry analysts.
"Sticker shock syndrome" -- the result of a 15 percent increase in new-car prices between the 1980 and 1981 models -- is one reason, says John Deaver, manager of Ford Motor Co.'s economics department.
The other is the persistence of high interest rates, which has crippled consumer confidence, says David Eisenberg of Sanford Bernstein & Co., a New York City marketing research firm.
The frustrating fact for the industry is that neither sticker prices nor interest rates should be doing such damage to the auto market at this point, based on past economic trends, these analysts say. But the psychological impact of these two economic benchmarks evidently is stopping potential car buyers in their tracks, Eisenberg says.
New-car prices have risen dramatically as companies struggled to maintain profits amid falling sales and at the same time cover the cost of expensive new pollution-control equipment.
The 15 percent jump is "an enormous increase, by historical standards, and that certainly has had a depressing effect," said Deaver.
Customers who return to dealer showrooms to look at new cars for the first time in three or four years may be staggered by what they see: a $6,966 sticker price on a new, two-door Chevrolet Cavalier "J car," with another $1,110 for air conditioning, power steering and freight charges; an $8,218 tag on a new Toyota Corolla four-door station wagon with air conditioning, power steering, AM radio and trim package, plus freight and dealer's charges; $7,819 for a two-door Honda Accord with air conditioning and AM radio; or $8,380 for the fanciest Mercury Lynx wagon with air conditioning and power steering.
Car sales soared in February and March, when manufacturers' and dealers' rebates were cutting $300 to $700 from car prices but without rebates sales have dropped by half -- evidence of the effect of prices on sales, says David Healy, an auto industry analyst with Drexel Burnham Lambert in New York City.
While prices were rising, real disposable income -- the amount left over after taxes and accounting for inflation -- was increasing sluggishly. The rise in disposable income was 2.9 percent in 1980, and only half that during the first half of this year. The result was a significant gap between the two rates of increase, in disposable income and in the price of a new car.
But that gap began closing this spring and has virtually disappeared, according to Healy, and no longer explains the continuing stagnation of auto sales.
If consumers looked at car prices from a longer perspective, they'd see that even with the recent price increases, new cars are a bargain, Eisenberg contends.
The average payment on a new car takes a significantly smaller cut out of spendable income than it did 10 years ago, he says. [TEXT OMITTED FROM SOURCE] per month on an auto loan, and average after-tax household income was $956 a month," said Eisenberg, citing statistics from General Motors Acceptance Corp., GM's auto financing subsidiary.
Thus the average car payment took 12 percent of household income.
In 1975, the household income figure had risen to $1,271, and the car payment was $143, or 11.2 percent of take-home pay.
Last year, the average car payment had jumped to $195 monthly, but household income had grown to $1,909, he said, making the car only 10.2 percent of a family's monthly income, he said.
"Sure, sticker prices have gone up," Eisenberg said.But income growth over the past decade, and extension of the length of auto financing contracts have made cars more affordable, now less, he added.
The spectacular rise in interest rates hasn't had that dramatic an effect on monthly costs for new car buyers, said Healy.
A $7,800 car loan at 16 1/2 percent, financed over 42 months, would require monthly payments of $227, said Healy. Add a full percentage point, making the interest charge 17 1/2 percent, and the monthly cost rises to $230, hardly an intimidating increase.
Auto sales have clearly been hurt, however, by the tight restrictions on credit maintained by the Federal Reserve System since the fall of 1979. Banks are just not interested in making car loans at 16 percent when it costs them 19 percent or more to borrow new funds, said Eisenberg. As a result, banks have taken a tough stand on auto credit applications, demanding higher down payments and turning down people whose credit is already stretched thin. In January 1980 more than half of auto loans were made by banks. A year later, only 36 percent of car loans came from banks -- a benchmark of the credit crunch.
Deaver, of Ford, believes the psychological effect of high interest rates is critical. "People know that when they see high interest rates, what happens afterwards isn't very pleasant." The reaction is to avoid big expenditures. Polling organizations that test consumer confidence are seeing a new round of pessimism in reaction to interest rates, he noted.
It may take another round of rebates to restart car sales. In past years, manufacturers have offered cash incentives to dealers in June, to boost sales. mThat wasn't done this year because the companies are too short of cash. Many dealers currently are cutting $500 off the sticker prices of new cars to make sales, and the auto companies may have to chip in too, industry analysts say.
When will it end? Deaver's computer calculations aren't providing an answer: By past precedents, the recovery should be under way now.