Robust US Auto Sales May Only Mask Underlying Deflation

Joe DeGiorgi's showroom mocks the notion that a deflation-induced recession is nigh.

It echoes with the constant call of an intercom and the laughter of hustling salesmen.

Auto sales, a traditional early signal for a slump, are strong nationwide.

But some analysts think they may be sending the wrong signal. This time a recession would probably be triggered from abroad by financial turmoil. So helter-skelter financial markets - not shrinking auto sales - would sooner sound the alarm.

Indeed, Mr. DeGiorgi's sales are strong because Ford is at the front of a possible deflationary wave. The Big Three automakers are offering their biggest buyer incentives in years because of cheaper raw materials such as steel, competition from cheaper Asian imports, and a staggering overcapacity in the world auto industry.

"I've been in this business for 20 years," says DeGiorgi, "and I've never seen the financing programs be so aggressive." He has slashed the price $1,000 on the 1999 Ford Taurus four-door, and $1,800 on the Taurus station wagon.

But financing is the biggest enticement. Most 1999 models go off the lot with 2.9 percent loans. A buyer of a 1998 car pays basically in installments, with only a 0.9 percent loan rate.

"These incentives are just an expression of deflation," says Sean McAlinden, an economist at the Office for the Study of Automotive Transportation at the University of Michigan in Ann Arbor. Generous incentive programs in the 1970s and 1980s signaled the onset of recession, he notes.

The recent weakening of the US dollar should blunt competition from Japan, which this year has raised its US exports for the first time in 11 years. Japanese companies look to US sales for relief from an 18 percent collapse in auto sales at home, says Mr. McAlinden.

But foreign competition in autos and auto parts will be sharp regardless of the jigs in the Japanese yen. The world auto industry epitomizes the excessive investment and overcapacity that is spurring financial turmoil and deflation worldwide.

East Asian banks and businesses invested recklessly in auto plants during the past 15 years and now the region accounts for much of the world's excess auto production.

Auto plants worldwide rolled out 57 million vehicles last year but only 53 million were purchased. The glut of vehicles will rise to 5 million by 2000, according to some estimates.

The flood of goods poses a classic deflationary threat to US jobs and profits. Imports of comparatively cheap vehicles, parts, and engines accounted for 85 percent of the $2 billion surge in the trade deficit for August, according to figures released last week by the US Commerce Department.