Rapidly rising auto prices may slow down US recovery
A few years ago Lee A. Iacocca, then president of Ford Motor Company, shocked car buyers with a remark that the $10,000 Pinto was not far off. Well, the Pinto is gone -- and so is Mr. Iacocca from Ford -- but his point stands.
The average sticker price of a 1981-model US-built automobile is well over $9 ,000.
Even the new Chrysler K-car compact is going out the door at $7,500 to $8,000 ; and the Ford subcompact Escort is not too far behind.
And with inflation running at an annual rate of 13 to 14 percent, the end of the sharp price rise in automobiles is nowhere in sight.
Will the sharp price increase in cars short-circuit the slow recovery now under way?
A report by the automotive division of Chase Manhattan Bank's economic-forecasting subsidiary believes it will.
"The 20 percent or so price increase over the past year will be enough to discourage many buyers entering the market during the fall," asserts the bank. "There is a great risk that domestic new-car sales could take a nose dive during the fourth quarter."
Detroit couldn't disagree more, saying that its own economic forecast calls for a 10 percent rise in total new-car sales to around 10 million, including the imports, despite the sharp upswing in prices.
So, while the repeated increase in car prices may cause some board-room concern, automakers don't expect that it will keep motorists out of the showroom or convince a lot of them not to sign on the dotted line.
To meet the higher prices motorists are turning to four-year-or-longer auto loans and keeping their cars longer in the first place.
US automakers face an expenditure of $70 billion or more for in-plant and product investment over the next few years, and car buyers will end up paying the bill.
Industry leader General Motors alone, for example, is scheduling an outlay of
Domestic car prices in the last 12 months have risen an average of 20 percent in repeated small bites, including two increases in the last few weeks alone. The highest percentage increase is falling on the resized small cars because that is what the public is buying in the largest numbers.
Indeed, the biggest percentage increases will continue to fall on the buyers of compact and subcompact cars. Historically, the largest profits have always been made on the largest and most luxurious cars, even though the cost of building them is not much more than for the cars at the low end of the market pole.
Even the imports, pressured by inflation and ever-toughening government-mandated emissions and safety standards, are repeatedly jacking up the prices of their cars as well, relying on their long-standing reputation for high quality and value for the money to make the prices stick.
The industry, in fact, is optimistic for the future, saying that domestic new-car sales hit bottom in May, with a total annual sales rate of 5.5 million, and since then has been on a gradual upgrade, reaching a 7 million anual sales rate at the start of the '81-model year in September.
"Unlike the automotive recession, which was constantly predicted by many economists and analysts for almost two years before it began, the turnabout in domestic automobile sales has received far less attention," protests the Ford Motor Company.
"Somehow," the company asserts, "everyone wants to predict a recession or a downturn in a specific industry, yet far fewer seem compelled to predict the bottom of a recession or the first movements out of the economic trough."
Auto prices do not vary significantly in relation to wages, declares Ford. "Both go up," the company adds. "Over the past 15 years the average car price has declined as a share of the median family income."
Meanwhile, getting at the actual price rise on a specific model of car is hard and almost calls for an advanced course in mathematics, complain motorists. The auto industry is continualy juggling standard and optional equipment on cars , changing dealeer discounts, and generally muddying the water for the motorists.
Because of the change in the discount structure, dealers are less likely to deal as in the past because they have less profit margin with which to bargain with a potential buyer.
As a result, the car you buy will cost you a lot more than the car you bought three or four years ago.
And getting the comparative figures may come a lot harder as well.