A Slowing Economic Recovery Could Spell Trouble for Automakers

- Alec Gutierrez, senior market analyst of automotive insights for Kelley Blue Book

Consumer confidence declined for three consecutive months, while job growth stalled, driving the unemployment rate up to 8.2 percent.  Both figures are better than a year ago, so even though the recovery has slowed, conditions are still improving albeit at a snail’s pace.  So far, consumers have largely ignored the signs of a slowing recovery and have opted to buy new cars when necessary.  While economic conditions are generally stable in the United States, don’t expect auto sales to maintain their current strength if the turmoil in Europe drags down America’s economic recovery any further.

With Europe on the brink of a total economic meltdown and United States recovery hanging on by a thread, there is growing concern that the auto sales recovery could stall.  Although fears of Greece leaving the Euro subsided with the recent victory by the pro-Euro New Democracy party, Spain has emerged as the next nation in need of a potential bailout to remain solvent.  Although Greece and Spain are the two nations most at risk of default, the unemployment rate in the 17-nation Eurozone is nearly 11 percent, and it is clear the slowdown is widespread and far from over.  Europe will continue to drag down the balance sheets of domestic automakers that have issues with excess capacity in the region.  In fact, the European downturn already has led to hundreds of millions of dollars in losses during the past year. 

As conditions in Europe continue to deteriorate, we could see a reduction in demand for goods imported from the United States.  This could negatively impact financial markets as stocks of export dependent firms take a hit in anticipation of revenue declines.  We also could see unemployment continue to creep up as some companies hold off on hiring or consider layoffs in anticipation of a prolonged global economic downturn.  If unemployment remains stagnant or continues to rise, the United States could see additional drops in consumer confidence and ultimately auto sales.