Academic journal article ABA Banking Journal

U.S. Automakers Still Spinning Their Wheels

Academic journal article ABA Banking Journal

U.S. Automakers Still Spinning Their Wheels

Article excerpt

THE RECESSION HAS, AS USUAL, hit the auto industry especially hard. Following an extended period of severe financial problems and eroding market share for the large domestic manufacturers, two of the Big Three now require government support to keep operating. Both Chrysler and General Motors are in the process of substantial restructuring that will continue in or out of bankruptcy. The end result will be firms that are appreciably smaller, and with a combination of the government and the unions owning a majority of shares.

Moreover, both firms still face a substantial inventory overhang, leading them to push back the scheduled return to higher production levels. The recently announced idling of plants will reduce second quarter output relative to what it would have otherwise been, but nonetheless motor vehicle assemblies should still be up at an annual pace of 30% this quarter, adding about half a percentage point to GDP growth. The increase comes off extremely depressed lows and reflects the gradual normalization of production at "transplants"--U.S.-located factories of foreign automakers.

Automakers in the U.S. are unlikely to see assemblies return to their past peak, as transplants will only handle a portion of the demand that is leaving the Big Three, and auto sales may remain low for quite some time.

The two government-assisted automakers will probably take substantial capacity out of the system in order to reduce costs. In the meantime, there is still plenty of capacity left in the U.S. The Fed's measure of capacity utilization shows the operating rate in motor vehicles and parts falling from a depressed 67. …

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