New cars are returning to the driveways of the world's largest economy, enough to attract a landmark investment by one of Canada's big banks.
As they begin to recover from the greatest economic downturn since the Great Depression, Americans are starting to spend again, and are cautiously rekindling their love affair with the almighty automobile after a cooling that almost drove the industry into the ground. Their return to the showrooms is steady enough to have sparked Toronto-Dominion Bank's $6.3-billion deal to buy Chrysler Financial, the auto lending business that previously belonged to the Detroit auto maker, from private equity firm Cerberus Capital Management LP.
Once a country that boasted more cars than Americans of driving age, the United States saw the collapse of auto sales during the credit crisis and ensuing recession become one of the strongest symbols of its strapped consumers. And the crash of the sector reverberated around the world, as suppliers to the Detroit Three auto makers in Canada and elsewhere fell idle.
Now, with U.S. auto sales expected to jump by about one million vehicles in 2011 from about 11.5 million this year and the Detroit Three returning to profitability on an operating basis, one of the key engines of the global economy is gearing up.
"In this next two- or three-year period it will grow to a $900-billion market," TD CEO Ed Clark said about the auto market. "So about $200-billion will get added to the market, just because cars get worn out and eventually at some point people buy cars, both used and new cars."
The consumer returning to the showroom is a much sobered one. Gone are the days when buyers tapped into the equity in their homes to purchase cars; Americans' savings rates increased during the recession, so much so that for the first time in 12 years, they are carrying less debt than Canadians. The U.S. debt-to-income ratio is 147.2 per cent, below the record-smashing 148.1-per-cent ratio in Canada. That suggests Americans are increasingly saving up for big-ticket purchases such as cars rather than racking up as much debt.
David Kelleher, who owns a Chrysler dealership in Glen Mills, Pa., near Philadelphia, has seen a change in his clientele.
"I used to do 100 prime credit and 70 non-prime deals over the course of a month," Mr. Kelleher said. "Right now, I'm doing 100 deals and they're all prime or near prime."
This is a change for the good, he noted, because many buyers should not have been given loans.
But the auto makers and their financing arms backed such deals because they needed to keep the sales numbers high and their plants operating to help pay for high fixed costs such as pensions and health care for U.S. workers. The credit crisis drove most of the subprime buyers out of the market.
With a jobless rate still at 9.8 per cent and a housing market that has yet to recover in most parts of the country, consumers remain fragile. But interest rates are still low, credit conditions have eased and there are suggestions that the job market is beginning a long journey to recovery.
"There may not be a lot of room for U.S. consumer spending to grow robustly, but probably the extreme tight straitjacket that they have been put in the last couple of years is starting to loosen," said Douglas Porter, deputy chief economist with BMO Capital Markets.
Despite the rebound, car sales remain well below pre-credit-crisis levels. In 2007, there were 1,054 cars for every 1,000 Americans of driving age, a number that dropped to 1,031 in 2009 and is projected to decline further this year and next before starting to climb back up.
This year's sales are still considerably less than the 16 million or more new vehicles that decorated U.S. driveways for much of the 2000s, but are a strong improvement from the trough of 2009, when Americans bought only 10.4 million new vehicles, a number that helped push General Motors Co. and Chrysler LLC into Chapter 11 bankruptcy protection.
Ford Motor Co., the only one of the Big Three that didn't file for bankruptcy protection, is expecting sales above 12 million and closer to 13 million, the auto maker's chief sales analyst, George Pipas, said Tuesday. The growth is underpinned by modest growth in the U.S. economy, Mr. Pipas said.
Like Mr. Clark, Mr. Pipas reasons that sooner or later people will need to buy new cars. "Keep in mind that every year auto sales are below trend, that means more and more people have deferred a purchase they would otherwise have made one year ago, two years ago, three years ago."
That is even more true in the United States than in most other countries, since 87 per cent of the work force uses a car to get to work, and 77 per cent drive alone, according to the U.S. Census Bureau.
Betty Cappelli Haase of Wellsboro, Pa., and her husband, Jack Haase, spent four months deliberating before finally settling on a Jeep, Chrysler's venerable off-road brand.
Since the couple is retired and mindful of their budget, they worried about absorbing the rising price of gasoline and insurance along with the basic upkeep of their home. "My husband has a nice little [savings]cushion, and we really need to be wise about what we spend it on," Ms. Cappelli Haase said.
"My husband said, 'We are not going to buy. We are just going to go look,' " she said in a telephone interview from her home.
At about $22,000 (U.S.), the dark-red 2007 Commander - her fourth Jeep - was partly financed by the dealership. "She's a real beauty. I call her Foxy."
The recession and the gas price spike of 2008 accelerated a shift among U.S. consumers to smaller vehicles, Mr. Pipas said. The fastest-growing segment of the market for the past few years has been crossover utility vehicles that combine the ride of a car with the usefulness of a sport utility vehicle, but are smaller and use less gasoline. Mr. Pipas attributes the shift in part to the aging of baby boomers and the fact they no longer need larger vehicles to haul around big families.
For some, it makes sense to spend when rates on savings are so low. Ira Shankman, a professor at New York University, recently purchased a new Infiniti M37 for $54,000 in cash.
"…We had money in the bank," Prof. Shankman said. "And believe me, with the bank paying just 1 per cent, it was 'What the hell, buy a car.' "
For the auto makers - and now for TD - the appetite of U.S. consumers for cars is, along with consumer confidence and other economic measures, a major part of the sales projection.
"Let's face it, it is arguably the biggest car culture in the world," Mr. Porter said. "Even though China has supplanted it as the No. 1 auto market in the world, on a per capita basis you'd be hard-pressed to find a society that loves its cars more than the U.S. does."
With a report from Grant Robertson
Rita Trichur