Dangerous, Challenging, Very Exciting Years Ahead
Knight Kiplinger, the keynote speaker for WANADAês Annual Meeting, prefaced his remarks by saying that, Kiplinger [publications], lives in the future, trying to write next monthês history. And thatês what he proceeded to offer dealers in a wide ranging economic and political forecast for the nation and the auto industry.
On The U.S. Economy
Kiplinger said that we are no longer hearing talk about a looming recession that dominated the media earlier this year, which he credited to an end to rising interest rates and a drop in oil prices, which clearly were too high.
To see what lies ahead, Kiplinger said, You have to look at the performance of four key groups in the U.S. economy which utilize what America produces consumers, business, the government and overseas customers.
Consumers are getting tired of the economy not exhausted, but tired, he said. The cash out refinancing of a few years ago, a lot of which went into second homes, remodeling and, yes, automobiles, has pretty much run its course.
American business, on the other hand, is spending freely, and that is one of the things that will take up the slack of softer consumer demand. Corporate earnings are very strong, but the double digit, quarter-over-quarter growth and profitability of the last four years is going to come to an end sometime soon, he said. There will be high, single-digits in growth, he said.
The U.S. government, which is a major buyer of goods and services, is spending money like a drunken sailor and thatês not going to stop any time soon, said Kiplinger.
Overseas customers, Kiplingersês fourth group, are also experiencing strong growth and will make a great market for everything America sells.
This all adds up to continued growth, but at a lower level, in the neighborhood of 2.5 % GDP growth, he added.
The economy wonêt stall because the stock market has actually under performed the growth in corporate earnings, he said. Profits have been rising in the double digit range, but stock prices did not keep up.
Without competition from residential real estate, stock prices will once again track corporate profits, Kiplinger predicted. So look for high, single-digit gains on the major indexes over the next couple of years.
Impact of 2006 Election
As to what effect the recent changes in Congress would have on this economic forecast, Kiplinger said, the Democrats will want to raise the minimum wage. But all the banter about rolling back the Bush tax cuts, such as the 15% rate on dividends and capital gains was all talk because the Democrats donêt have the votes to do repeal, he said.
Despite Democrats being inhospitable to the repeal of estate taxes, Kiplinger predicted there will be a compromise, not total repeal, but a significant exemption on the size of the estate and lower marginal estate tax rates. Democrats, with no mandate for sweeping change and a razor thin majority,” will have to govern a lot harder, Kiplinger said. Republicans will have to revert to traditional themes of fiscal conservatism, balanced budget, integrity and ethics, and strong defense, he said.
Kiplinger cautioned not to get too excited about nominal change of control of Congress. From one narrow majority to another still requires a coalition of moderates from both parties.
Looking ahead to 2008, Kiplinger said, itês not a done deal. Although the current frontrunners are sitting senators, he reminded dealers that we havenêt elected a sitting senator since John F. Kennedy in 1960. More often, American voters have favored obscure governors for president. And there are good governors in both parties. he said.
Cars, According to Kiplinger
The auto industry is entering an era of extraordinary turmoil and upheaval, which has few precedents in American history, said Kiplinger. He compared it to the enormous shakeout of manufacturers in the 1920s, and to the dramatic change that occurred with the arrival of small imports from Japan in the 1970s.
The American car market today is a magnet for automakers from all over the world, giving consumers unprecedented choices and forcing unprecedented competition.
Domestic automakers will soon be facing imports from China and India, and these wonêt be Yugos in terms of quality and reliability, according to Kiplinger. Nor can Detroit count on bailouts and import restrictions that it got in the 1970s. There will be a lot of talk about tougher trade policy, easier access to foreign steel, subsidies of alternative fuel programs, and more jobs and training and benefits for laid off workers, he said. But Detroitês fate is in its own hands because its wounds are largely self inflicted.
Market share is the name of the game, making money at a smaller level of production.
He predicted auto sales will remain in the mid-16 to 17 million range for some time to come, which is good news for dealers.
He said the Internet changed the game of auto retailing, but not as dramatically as other industries, including his own, print publishing. Car buyers canêt take a virtualê test drive or get their cars serviced by virtual mechanics, he said.
As buffeted as dealers have been by the Internet, there are significant high touch customer relations aspects of the auto buying experience that will keep you in the ball game for a long time to come.
The future will belong to those who see the changes coming and who adjust their plans accordingly, Kiplinger concluded, which will require flexibility and an openness to new ideas and new ways of doing things.
My fervent wish for all of you is that you be among the flexible and resourceful who will prosper in the dangerous, challenging, but exciting years ahead, he said.
Download Bulletin PDF