Federal Reserve kept close eye on auto decline in ’09

David Shepardson
Detroit News Washington Bureau

Washington — The Federal Reserve Board opposed suggestions that it bailout automakers during the 2008-2009 financial crisis — but kept a close eye on the mounting decline in the auto sector, documents released Wednesday show.

The U.S. central bank unsealed transcripts of its meetings in 2009 on Wednesday.

Charles I. Plosser, who was president of the Federal Reserve Bank of Philadelphia and retired on March 1, said in a March 2009 meeting that Federal Reserve chairman Ben Bernanke was right to stay out of the auto bailout.

“If we don’t want to be in the business of doing fiscal policy and we want to discourage the Congress from coming to us to engage in fiscal policy, then we want to make it easier for us to say ‘no’ in those circumstances. I think, Mr. Chairman, you’ve done a terrific job in this; in the example of the Congress talking about funding the automobile companies, you were very clear that that was not our business. We want to discourage those kinds of requests, and my concern is raising the threshold for saying ‘yes,’ ” Plosser said.

At the same meeting, the board learned of the dire state of the auto sector — with the decline in auto production so severe it cut 2 percentage points off the change in real Gross Domestic Product in 2009.

The board was told that assembly of light vehicles fell to a 3.7 million unit pace in January 2009, “the lowest level since the 1950s, and that includes months in which there have been UAW strikes. Production increased to a still meager 4½ million unit pace in February, and we expect a further increase to about 5½ million units in March.”

The board predicted in March 2009 that motor vehicle sales would bottom out “in the next couple of months at levels just a bit below those seen in February. If that occurs, some further modest increase in production seems likely, as inventories will have been brought into substantially better alignment with sales. That said, production in the second quarter is only expected to move up to what we previously would have considered a deep recession level of 5¾ million units.”

Federal Reserve Chicago governor Charles Evans was blunt at the meeting. “Things have never been so bad. ... This is shaping up to be the worst economic downturn since the 1930s,” he said.

He warned that automakers were have severe trouble making loans — and rejecting half of applicants. “Ford said that when they’re making auto loans, the banks seemed to be getting the better-credit-quality buyers at the moment, but they said that their rejections on retail financing were 50 percent now, which is up 10 percentage points,” Evans said.

Federal Reserve Governor Elizabeth Duke recounted the trouble of automakers as well. “Rental agencies are trimming their fleets by about 20 percent. Dealers can’t sell, so they are looking to manufacturers to repurchase the inventory. A Lexus dealer said he has customers who normally would buy on a regular basis and can afford to buy, but are worried about the appearance of buying in a situation where people are losing their jobs,” she said.

But other aspects of the auto collapse didn’t appear to worry the board. Two days after GM filed for bankruptcy, the board held a conference call — and the subject didn’t come up.

At a June 23-24 meeting, Evans recounted a talk with the U.S. CEO of ArcelorMittal, the steel company. As prices fell from $1,000 a ton to $380 “which, I’m told, just covered variable costs. Since late last year, the firm has cut production sharply and repeatedly. Today their capacity utilization is about 40 percent, and they are running only two of their nine blast furnace facilities.”

“Making this judgment about sustainability is difficult, in part because Mittal’s chief customers today are the non-bankrupt auto companies and other durable goods producers whose order flow can be chunky. So if GM and Chrysler improve, that would further support production decisions like this,” Evans said. “The continued restructuring process at Chrysler and GM is a positive factor for manufacturing output and particularly in (the midwest).”

Then Federal Reserve Cleveland President Sandra Pianalto recounted how hard her area was being impacted as plants were being closed.

The plants that would remain open produced 2.3 million cars and light trucks in 2007. “Toyota and Honda plants account for over half of the total. Now, to give you an example of how low production has been for the past few months, in June these same plants collectively produced less than 36 percent of their 2007 output. Honda and Toyota were operating at well less than two-thirds of their 2007 levels, while the Big Three were at roughly 10 percent of their 2007 levels.”

The Federal Reserve said at an August 2009 meeting that the $3 billion “cash for clunkers” was simply shifting some sales ahead, quoting auto companies.

Ford “had an interesting story about which future sales were being stolen by the program. A substantial segment of the clunker trade-ins have been well-maintained SUVs that are about ten years old and whose owners have good FICO scores, above 650. This leads Ford to think that, without the program, these people would have driven their clunkers for another couple of years. So perhaps we are stealing sales from 2010 or beyond, not just the fourth quarter. But GM suggested that the payback would be sooner. Also, any uncertain extensions of this program could freeze potential buyers,” said Evans.

Pianalto praised “cash for clunkers” at a September meeting. “This increased production in autos and industries related to autos was critical to the stabilization in” output.

A June meeting recounted the dire shape of the U.S. economy. Federal Reserve Dallas President Richard Fisher noted how long it would take to fix the economy. “This was underscored by the CEO of AT&T, who said, “’If it isn’t life or death, we’re not hiring anybody or investing in anything.’ And I think that’s pretty much a unanimous view around the table of CEOs that I spoke to.”