Wednesday, October 05, 2005

The Economist as Romantic

Why do love affairs come to an end?
Love affairs come to an end when their price gets too high.

James Hamilton at Econobrowser remarks (my emphasis):

U.S. automakers can't be very pleased about September sales figures.

Automotive News reported today that GM sold 24% fewer light vehicles in September 2005 compared with September 2004, while Ford sold 20% fewer vehicles. SUV's led the retreat, with sales of Explorers, Expeditions, and Mountaineers each down more than 50%. Although Toyota's sales overall were up 10%, their SUV's (4Runner, Highlander, Land Cruiser and Sequoia) were all down as well.

U.S. car sales
had been sagging earlier this year. With its summer employee discount program, GM was gambling that American consumers would return to their love affair with big cars, and all that was needed was a strategy to get past a temporary lovers' tiff. That gamble isn't looking so great at the moment. Although car sales temporarily went way up, GM's North American division lost $1.2 billion in the second quarter, and the gas guzzlers that consumers bought earlier this summer may look like albatrosses to them now each time they pull out a C-note to fill 'em up. Without those discounts, sales are falling like a rock.
Stuck with a lot of SUVs in their fleet, U.S. consumers adjust very little even to large increases gas prices (although Econbrowser notes that bike ridership is up). Over time, however, the composition of the private automobile fleet will change as owners trade in SUVs for vehicles with better mileage.

People do respond to incentives. People do make substitutions. And in the long run, the price of gasoline will moderate even if demand from India and China continues to be strong.

Aside: At GM the lights are on but nobody's home, again.

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