Back in 2003, I took a summer job in Connecticut, New England, shifting furniture for people who were moving out of the state, to new jobs or homes elsewhere.
One customer fretted about his petrol costs as I staggered under the weight of his large-screen TV, off a dirt track seven miles from New Haven. It was costing him an extra 50 cents a gallon to fill his 11-mile a gallon Ford pick-up truck, and he was seriously considering trading it in.
“If I don’t go getting myself a sedan, I won’t be able to drive two miles to the store, never mind halfway to Texas,” he said, visibly shaken at the prospect of forking out an extra few dollars to fill his tank.
Well, if he hasn’t already traded in that pick-up, he certainly will have now. In 2003, US gasoline prices were $2 a gallon. It’s now double that, and US consumers, as well as carmakers, are really feeling the pinch.
US vehicle sales fell 13% in July, as demand for fuel-hungry sports utility vehicles (SUVs) and light trucks tumbled. General Motors reported its third-biggest loss in 100 years last week. Sales of its cars and light trucks fell 26%, 29% at rival Chrysler, and 15% at Ford.
The second half of the year is expected to be even worse. “We expect the second half of 2008 will be more challenging than the first half as economic and credit conditions worsen,” as Ford sales chief Jim Farley put it.
The run up in oil prices past $140 a barrel has been one of the chief drivers behind the drop off in sales. But even now, with prices falling below $120 a barrel yesterday in New York, it’s clear that America’s love affair with the big car has all but disappeared. Ford has already said that it will add six European small vehicles to its US line-up, which will be built and manufactured in three large truck and SUV plants that it will begin retooling in December.
The good news is that oil prices are now falling, edging below the $120 a barrel mark yesterday. But unfortunately, even in a smaller car and with oil prices falling back to the $100 mark, things are not going to get any easier for average American. Unemployment is continuing to rise and house prices – which have acted as piggy banks for many Western consumers in recent years – are still falling fast. That negative equity “poverty” effect will be a drain on household balance sheets for years to come.
Meanwhile, consumer price inflation surged 0.8% in June, reports the US Department of Commerce, the biggest rise in 27 years. Even with oil prices falling back, it will be several months before the effects fall out of the inflation figures, and even longer before today’s high oil prices feed through the system.
And that’s why American consumers – once the most tireless in the world – are finally cutting back on their spending. After taking account of higher prices, consumer spending actually fell 0.2% in June. The government’s $168bn (£85bn) tax rebate stimulus programme for the US economy is coming to an end, without any sign of having done much more than helped consumers pay the bills for another month or so.
Yet with the threat of inflation still high in the minds of the Fed, it’s unlikely the US central bank will feel able to cut the key interest rate from its already-low level of 2%, when it announces its latest move later today. It’s unlikely that lower interest rates would do much in any case, now that consumers are scared of borrowing and banks are scared of lending.
US consumers are facing a very tough few months – and it’ll take a lot more than swapping the SUV for a three-door sedan to bail them out.