The domestic automakers have come roaring back, with strong earnings and a parade of new models that are among the most appealing in the industry. But one thing you won’t see in their sales or earnings reports is the ongoing debt they owe to Washington.
General Motors (GM) and Chrysler both received unpopular federal bailouts in 2009 that provided the cash they needed to stay in business as they worked through epic bankruptcies. Ford (F) didn’t get a bailout, but it did benefit from the GM and Chrysler rescues, plus it has received nearly $5 billion in government loans since 2008. Taxpayers are still out about $1.3 billion on the Chrysler bailout and $19 billion on the GM bailout. Ford has pledged to repay its federal loans with interest.
All three automakers characterize the federal aid they’ve received as a one-time anomaly that will never happen again. Yet they’re benefiting from another set of government strategies that may be aiding their comeback just as much: The Federal Reserve’s easy-money policies, which are one of the biggest factors boosting car sales right now.
Most analysis of Fed policies focuses on how quantitative easing — the Fed’s huge bond-buying program — has helped push stock prices to one record high after another this year. But the same policies are driving auto sales back toward pre-recession levels, even though unemployment remains high, credit is still scarce and many consumers are far more pinched than they were before the recession.
A direct beneficiary
The Fed is actually using two types of monetary policy to steer the economy: quantitative easing, which pushes down long-term interest rates, and super-low short-term rates, which the Fed sets directly. And unlike most other sectors of the economy, the auto industry directly benefits from both types of stimulus.
Low long-term rates are boosting auto sales mainly through their effect on the housing market. The housing bust essentially ended last year, and low mortgage rates engineered by the Fed, combined with home prices that are 20% to 30% off their peaks, have been instrumental in getting the housing recovery started. That in turn has generated a lot of new business for builders and contractors, after a brutal five-year lull. And that has led to a surge in sales of pickup trucks, which are highly profitable for automakers and have been a big part of the reason for robust earnings at GM, Ford and Chrysler.
Low short-term rates help automakers, too. Unlike 30-year mortgages, the rates on auto loans, which typically range from three to seven years in duration, are tied more closely to short-term rates set by the Fed. And cheap loans have helped keep monthly payments down for car buyers, which has encouraged them to buy more-expensive cars. The average price paid for a new car is now $31,125, according to TrueCar.com, a rise of more than $2,300 during the past three years.
Overall, the rebound in car sales is much more impressive than the housing recovery. U.S. sales hit about 16.9 million vehicles per year during the housing boom, then plunged to less than 10 million in 2009. They’ve now bounced back to a rate of nearly 16 million per year, which is only about 6% below the pre-recession peak. The pace of home sales, by contrast, is still about 34% below the pre-recession peak.
The Detroit 3 have arguably recovered even better than the industry as a whole. GM earned $2.5 billion in the first half of the year, with sales up 8% over 2012 levels. Ford’s first-half profit was $2.8 billion, with sales up 13% from 2012. Chrysler’s recovery is trailing that of its crosstown rivals, yet the No. 3 domestic automaker has still notched a 9% increase in sales this year. It reports second-quarter earnings July 30.
All automakers, not just the domestics, benefit from the low interest rates spurring sales. The Detroit 3 do have a disproportionately large share of the pickup market, however, so the boost in sales that’s occurring as a collateral benefit of the housing rebound does favor the domestics. GM, Ford and Chrysler may also benefit to some extent from the recent uptick in long-term rates, which boosts returns on their pensions and eases pressure over unfunded obligations.
Some consumers rebelled against the GM and Chrysler bailouts in 2009 by pledging never to buy from those automakers again. But there are reasons for bailout critics to quell their bellyaching. For one thing, the European and Asian automakers against which the Detroit 3 compete also enjoy subsidies from their own governments, including healthcare costs that are typically borne by the government rather than by employers in most industrialized countries. That provides a considerable cost advantage for foreign automakers.
The softer bailout that comes from friendly Fed policies may also end up imposing little or no cost on taxpayers. The Fed’s easy-money policies are controversial because there’s a chance they could produce runaway inflation at some point in the future. But there’s no sign of that happening yet, and Fed critics predicting doom have been consistently wrong.
Meanwhile, the auto industry employs nearly 3 million Americans, and it’s growing once again. And America needs all the jobs it can get. Perhaps we should applaud the automakers no matter how they’re earning their profits.
Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.
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