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Chicago Fed's Automotive Outlook Symposium Calls For Economic Growth Slightly Above Trend

Expectations are for unemployment to dip, energy prices to moderate, inflation to fall, and light vehicle sales to remain steady.

More than 80 economists and analysts from business, academia, and government recently attended the thirteenth annual Automotive Outlook Symposium held by the Federal Reserve Bank of Chicago, and the consensus is that the U.S. economy will grow at a pace slightly above its trend through 2007.

For 2006, expectations are that GDP will rise 3.5 percent, then by 3 percent in 2007. Housing is seen as falling in 2006 and 2007 at a controlled pace, while unemployment should fall to 4.8 percent in the fourth quarter of this year and reach 4.9 percent in 2007. Inflation will go to 2.6 percent this year and 2.4 percent next year, the survey projects, while oil is expected to fall to $65.51 at the end of 2006, remaining at a similar level of approximately $66.00 per barrel in 2007.

As for the outlook for heavy equipment, Ken Vieth, co-principal for Americas Commercial Transportation Research Co., says the Environmental Protection Agency’s mandates to reduce emissions in 2007 are expected to continue supporting the high sales of Class 8 trucks, or those trucks that haul everyday products.  However, a global shortage of truck drivers means that the trucking industry needs to find an alternative for transporting goods. Transport by rail is one such alternative, though rail alone wouldn't be enough to handle the load. For 2009, a highway bill has a provision that, if passed, would allow for longer and heavier trucks, thus increasing the amount that each truck could transport.

Light vehicle sales are predicted to come in at 16.7 million units this year and 16.8 million in 2007, similar to the 16.7 million forecast and 16.9 million actual units sold in 2005. Industrial production should increase 3.6 percent this year and 3.3 percent next. Business fixed investment is seen as increasing 8.9 percent in 2006 and 5.9 percent in 2007, and personal consumption expenditures should expand by 3.5 percent in 2006 and 2.9 percent in 2007.

According to the sales outlook for the Big Three automakers by Paul Ballew, executive director of global market and industry analysis for GM, higher oil prices and interest rates, combined with the slowing of the housing market, means that automotive sales predictions are for an increase of just 1.5 million units this year.

In the auto suppliers’ perspective on the auto industry outlook, David Andrea, vice president of the Original Equipment Suppliers Association said U.S. domestic motor vehicle sales are strong, but not growing. Manufacturing jobs have been reduced as the Big Three’s sales have been declining, while international auto makers’ sales have been increasing. 

When it comes to the future for the U.S. automotive industry, chairman for the Center for Automotive Research David Cole sees the need for domestic auto companies to shrink to obtain a profitable base.  According to Cole, a 60-80 percent reduction in the number of physical prototypes required by manufacturers is necessary in order to see an improvement.

Analyzing the forecast from 2005, the economy was predicted to expand at a 3.2 percent clip, slightly below the 3.5 percent that actually occurred. Similarly, the expected unemployment rate decrease to 5.2 percent was close to the actual 5.1 percent rate. Oil prices were forecast to be approximately $49 a barrel, but were actually over $56.

Manufacturing output increased 4.3 percent in 2005, followed a 5.9 percent increase in the first quarter 2006. Light vehicle sales remained stable, but market share for the GM, Ford, and DaimlerChrysler fell, averaging 54.9 percent in the first five months of 2006. That loss equates to about a 400,000 unit sales loss, which is comparable to the output of two assembly plants.