A Small Recovery Is Still a Recovery

Fitch Ratings, which achieved a small measure of credibility over other rating agencies due to pessimism about collateralized debt obligations in 2007, is predicting a very modest recovery in the U.S. auto market in 2010. That sounds good, except that Fitch says such a recovery will lead to cyclical bankruptcies. This is from Reuters:

Like the airline industry before it, the auto sector, including suppliers, will grapple with ‘boom and bust cycles without the boom. ... Even in peak conditions, companies will not generate enough cash to repair their balance sheets, leaving them vulnerable to severe financial stress in downturns.

Fitch sees the market rising to 11.1 million vehicles sold in 2010. This is in the ballpark of what others have predicted. Obviously, well down from the 17 million peak managed in 2006, but a notable step up from the sub-10-million number that may or may not define 2009.

The concern is that GM and Chrysler will struggle, post-bankruptcy, to realize enough profits (if any profits at all) in a market of that size (although the new GM is supposed to be optimized for profit in a U.S. market of 10 million). Fitch notes that neither GM nor Chrysler has access to capital right now. Ford (F) does, but it also has more than $30 billion in debt to deal with. The true size of the U.S. auto market in 2010 is important, because it’s among the factors that will determine whether GM in particular can go for an IPO prior to next year’s mid-term elections.

So let’s say we only add an additional million units to the market next year. That’s a tepid bounceback, but a bounceback nonetheless, and if it’s sustainable and we get to 12 million to 13 million by 2011 and 14 million to 15 million by 2012-14, then we could see both GM and Chrysler, appropriately restructured, able to generate steady profits. GM is also in a good position right now to seize on Toyota’s sudden safety woes and gather back some lost market share in important categories, such as family sedans.

One of the things could hurt a U.S. auto recovery higher gas prices at the pump. There have been predictions of $4 a gallon or worse by mid-2010. But oil would need to approach $150 a barrel for that to happen, and a global supply glut will likely keep it at more like $75-$80 a barrel. If it rises beyond that, it will be on the strength of a better-than-expected recovery, led by demand, which could actually improve the auto-market forecast.

Then you have to consider consumer behavior. In most households, viable transportation is an essential expense, right up there with food and shelter. If employment improves in 2010-11, a way to get to work will have to be factored into the budget. However, Americans should continue paying off debt and improving or at least maintaining savings through then, which could mean less spending on nonessential consumer goods. Ironically, the auto market could sustain an upward trend while other sectors begin to decline. Even the New Normal will eventually need a new car!