(WXYZ) — In the past, Michigan and the auto industry have been leading indicators when we are heading into recession.
A chart created by Deloitte, shows that auto production often drops before an economic downturn. So what is happening in the auto industry?
There have been some auto job cuts or layoffs in recent months. Stellantis is confirming there will be an indefinite layoff at the Sterling Stamping Plant beginning next week.
At Avis Ford on Telegraph Road, retired Detroit Lions offensive lineman Larry Lee tackled the task of buying a new vehicle for his wife. It is something they normally would have done two years ago.
“It worked out where her lease ended at the beginning of COVID, so we said we don’t need two vehicles and we’re not going anywhere,” Lee said.
Now, things have changed.
“It’s a little too active for one vehicle now,” Lee said. Lee’s story is an example of the pandemic’s pent-up demand and part of why Avis Vice President Edmund Douglas is struggling to keep inventory.
He has 70 vehicles in stock but used to average 500. The other reason: The pandemic caused supply chain issues and a shortage of semiconductor chips, which are often made in China.
“I think the F-150 has like 1,200 chips in it or something,” Douglas said.
The result? While overall prices for things increased 8.6%, between May 2021 and May 2022 new vehicles increased in price by 12.6%. Used Vehicles are up 16.1%.
Now as the Federal Reserve raises interest rates, car loans will get more expensive.
Douglas says they are about twice what they were a year ago, close to 6%.
“You factor that in with interest rates, you could see payments as much as about $100 more than a year ago,” Douglas said.
Sandy Baruah is Detroit Regional Chamber CEO and on the Federal Reserve Bank of Chicago-Detroit Branch board of directors.
"There is certainly the old rule, when the nation caught a cold, Michigan caught a flu," he said.
According to Baruah, the auto industry and Michigan may actually be positioned to out perform relative to the past if we do have an economic downturn as the federal reserve tries to decrease economic demand and inflation with higher interest rates.
We have diversified out of the auto industry. And the auto industry is targeting a high-end customer relatively less impacted by inflation if the job market stays strong.
"They are really focusing their production on high profit vehicles, high value vehicles, GM trucks, Ford Bronco, Jeep Grand Cherokees," he said.
Daniel Hearsch is a managing Director at AlixPartners — and co-leader of its automotive and industrial practice."It probably isn’t the same as it was in the past," he said.
Hearsch said automakers are operating somewhat lean because they don’t have parts to make cars. "Where you will start to see those signs of trouble is where people start canceling those long-term orders," said Hearsch.
Douglas says Avis is operating conservatively to prepare for a downturn.
"There is going to be a point where the customers say, 'hey, I can’t do it right now,'" said Douglas.
But right now, there continues to be high demand from customers like Lee and his wife.
"She likes the Bronco. She is willing to wait. I don't know if I am willing to wait," said Lee.
It is important to keep perspective. Industry leaders are charged up — optimistic about the future in the long run — even if there are short-run challenges.
