(3 mths ago)
It’s been years since we’ve heard about production cuts by automakers, but here they come.
After a record-breaking 2015, the hot air is audibly hissing out of the auto industry. September sales were down 0.5% from a year ago. Year-to-date sales were about flat. Some individual models got clobbered. Inventories are piling up on dealer lots. Automakers lavished incentives on the market. Nothing worked.
Yet, auto production in September had jumped 7.3% year-over-year, according to the industrial production report this morning. In my article earlier today on this phenomenon [Is this Why US Industrial Companies Don’t Invest?], I explained: “Something has to give: either a miraculous jump in sales or a cut in production.”
The digital ink wasn’t even dry when we got the answer from the horse’s mouth. And no, sales hadn’t miraculously jumped. Instead, production is going to get cut.
The harbinger that auto sales and swelling inventories would hit production and manufacturing came on October 11, when Ford announced that it would halt production of Mustangs for a week at its Flat Rock Assembly Plant.
“We continue to match production with demand,” spokeswoman Kelli Felker told the Detroit News.
Mustang sales had plunged 32% in the month from a year ago, despite about $2,700 in incentives per deal. Year-to-date sales were down 9.3%. Mustang inventories on dealer lots at the end of September had ballooned to 89 days’ supply – so let’s face it, the dreadful 90 days – when 60 days is more than enough. That’s nearly 50% overstocked!
But no big deal, it was just a week, and it was just the Mustang, not Ford’s lifeblood, such as high-profit-margin F-series trucks – the F-150 being the best-selling model in the US; or SUVs, such as the compact Escape, Ford’s second-best selling vehicle; or even cars, such as the Fusion, Ford’s third best-selling vehicle.
But sales of F-series pickups had fallen 3% in September from a year ago, with inventories ballooning to 95 days’ supply, according to Automotive News. Overall light truck sales, including SUVs, were down 2.9%, according to Motor Intelligence.
So this evening, the inevitable happened: Ford announced that it will shut down production of its F-150 assembly plant in Kansas City for a week, though the Dearborn Truck Plan in Michigan would continue production.
And there’s more: Ford will also shut down production of the Escape, whose sales had plunged 12% year-over-year in September, and of another SUV, the Lincoln MKC, at its Louisville Assembly Plant for two weeks.
And it will shut down two plants in Mexico. Both make cars: the plant in Hermosillo, which makes the Lincoln MKZ and the Fusion whose sales had plunged 17.5% in September; and its plant in Cuautitlan which makes the Ford Fiesta.
Ford said it would lay off about 9,000 workers in the US and 4,000 in Mexico. So 13,000 of the 14,000 employees at those plants will be laid off for the period.
(3 mths ago)
And this miserable capacity utilization explains in part why business investment is so low: Utilization isn’t maxed out, not anywhere near, with some sectors suffering from overcapacity.
These companies are facing stagnant or declining demand for their products. And even though money is dirt cheap and credit plentiful for larger enterprises, and even though they have levered up and borrowed and stuffed their balance sheets up to the gills with record amounts of debt, they have little incentive to invest in productive activities because they don’t see enough demand for their products.
So they do other things with this borrowed money, such as buying back their own shares and buying out each other. Lack of demand in the real economy, despite – or we might be tempted to say because of – years of central-bank free money policies, is tough for individual businesses to overcome.
(3 mths ago)
How does the US escape a recession with interest rates at record lows....