Subprime squeeze hits automakers

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Major automakers reported that sales fell victim to the credit crunch last month, with Ford sales plummeting 14.4 percent, Chrysler down 6.1 percent and Toyota posting a rare 2.8 percent decline it attributed to financing problems.

Consumer sentiment has plunged in the past month amid tightening credit conditions, and fewer people have been able to use home-equity loans or cash-out refinancings to finance car purchases. Millions more people are facing the prospect this fall of no longer being able to afford new car payments because their mortgage payments are resetting at dramatically higher rates.

GM bucked the industry trend last month, reporting a 6.1 percent increase in sales over the previous year on increased buying interest in smaller, more fuel-efficient trucks and cross-over utility vehicles. But the company said the entire auto industry is feeling the effects of high gasoline prices and the housing and credit crunch, and announced it will slash production accordingly in the fourth quarter. U.S. carmakers have had to increase incentives throughout the summer to prop up sales.

"The industry is certainly feeling the effect of macroeconomic events," said Paul Ballew, GM's executive director of global markets, noting that consumers are postponing or canceling plans to purchase autos because of uncertainty about the fallout from declining home prices and tightening credit.

"Reduced credit tied to the subprime squeeze challenged consumer confidence this month," said Jim Lentz, Toyota's executive vice president, noting that sales of Toyota's flagship passenger cars dropped 6 percent despite a pickup in sales of luxury and hybrid gas-electric cars.

Despite Toyota's decline to 233,471 vehicles sold during the month, Ford's bigger sales drop to 217,436 enabled Toyota to maintain its No. 2 spot in the U.S. market — a place it has held all year. Chrysler sales shrank further to 168,203 last month.

GM's rebound to 385,529 light-vehicle sales from depressed July levels, however, enabled the U.S. carmakers to avoid a second month in the embarrassing position of collectively holding less than 50 percent of the U.S. car market. That happened for the first time in July.

GM's good showing, along with increased sales reported by Nissan and Honda of 6.3 percent and 4.7 percent, respectively, also lifted overall car and light truck sales to 16.3 million in August from an extremely poor showing of 15.3 million in July.

"This year's pace of sales is shaping up to be its lowest since 1998," a Moody's Economy.com analysis said. "Vehicle sales are being affected by the downturn in the housing market in a number of ways. ... Credit problems in the mortgage market are spilling over to other debt, such as auto loans. This is then affecting the ability to purchase new vehicles."

Falling home prices also affect consumers' ability to purchase new cars by reducing the home equity they tapped into in past years to finance auto purchases, Moody's noted, and by extinguishing the wealth effect that came from fast-rising house prices earlier in the decade, which had boosted confidence and inspired people to spend more on big-ticket items like cars.

Stephen Stanley, chief economist at RBS Greenwich Capital, said car sales have weakened noticeably in California, the biggest market for cars in the U.S., "as the housing correction has hit households particularly hard in that state." California has the highest rate of foreclosures in the nation, and its residents were among the heaviest users of the hybrid adjustable-rate mortgages that are now resetting with monthly payment rates that are sometimes two to three times the initial amounts they paid.

Mr. Stanley said yesterday's auto sales figures will be closely examined by the Federal Reserve, which is considering whether to cut interest rates this month to prevent the credit crunch from bringing down the broader economy.

So far, evidence of the economy's performance during August has provided mixed signals for the Fed, including a report yesterday that showed somewhat diminished but continuing moderate growth in manufacturing activity, he said.

While some car customers and many mortgage and finance companies are experiencing an extreme credit crunch that is affecting car sales at some manufacturers, others such as GM and Ford so far appear to have ready access to the credit markets to finance investments and day-to-day business operations, Mr. Stanley said.

Whether the Fed decides to take action depends ultimately on whether consumer spending shows signs of "cratering in response to a weaker housing market," he said.