Auto parts output will resume uptrend in '09.

So far this year, U.S. production of motor vehicle parts is down 5% from the same period last year. But the downward momentum stabilized in the second quarter, and the declines will be less severe going forward. For 2008 as a whole, output of motor vehicle parts will be down 3%. Economic conditions are expected to improve moderately in 2009, and production of automotive parts is forecasted to expand by 2%.

The rate of decline in automotive parts is considerably better than the trend for motor vehicle assemblies. So far, the number of vehicles assembled in the U.S. is down nearly 15% from 2007. Here, too, it looks like the downward momentum began to decelerate this summer, and the monthly declines will moderate through the end of the year. Our current forecast is for vehicle assemblies to drop 7% to 8% in 2008, but they should begin to recover in 2009 and bounce back by 3%.

The chart shows the divergence in growth rates for parts and assemblies. One explanation is that consumer spending on new vehicles declines during periods of slow economic growth, but the demand for aftermarket parts increases as drivers keep older vehicles on the road. Another factor has been the declining value of the U.S. dollar, which has made imported parts more expensive in this country and domestically produced parts less expensive to foreign buyers.

These conditions will not be sustained over the long term, and the two trend lines will converge in the future. But for now the demand for domestically produced parts is holding up better than the demand for new vehicles.

The trends are different for different types of motor vehicles. The U.S. auto market is rapidly transitioning away from SUVs, pick-ups, and mini-vans and into more fuel-efficient cars. The number of cars assembled so far in 2008 is down a moderate 5% from last year, but the number of light trucks is down a startling 20%. This transition to smaller, lighter vehicles is far from complete, so the growth in autos is expected to remain higher than for light trucks in the foreseeable future.

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THREE TRENDS TO WATCH

The economic fundamentals that drive consumer spending on new motor vehicles will register modest improvement through the end of this year, but it will be well into 2009 and possibly as late as 2010 before the economy is once again hitting on all cylinders. Three important trends must be established before the demand for new automobiles will return to stronger levels. First is a decline in energy prices. U.S. demand for crude oil and gasoline has declined in recent months and this brought prices down from their peaks of earlier this year. The worst may be over, but we need the downtrend to persist for a while.

Second, the employment data must start to register gains instead of losses. We expect unemployment to hit a peak of just over 6% next spring and then start to decline consistently in the second half of 2009. And finally, the drop in housing prices must hit bottom. This will not only improve consumer confidence, but it will also free up the flow of funds throughout the entire credit market. The most likely scenario is that the housing market will hit bottom in the spring of 2009.

Bill Wood, Plastics Market Economist

Bill Wood, an independent economist specializing in the plastics industry, heads up Mountaintop Economics & Research, Inc. in Greenfield Mass He can be contacted by e-mail at [e-mail]. His monthly Injection Molding and Extrusion Business Indexes are available at www. ptonline.com.