William Strauss, senior economist at the Chicago Fed

The U.S. auto industry may lose some of its shine next year, William Strauss, a senior economist with the Federal Reserve Bank of Chicago, told Global Atlanta at a J. Mack Robinson College of Business conference in Atlanta Nov. 18.

“In general the auto industry has been the bright star since the beginning of the recovery,” he said, adding that gross domestic product and housing sales have fallen short of earlier forecasts.

He marveled that U.S. auto sales, which were predicted to reach 16.8 million are now on track to reach 17.3 million this year or even more.

“My concern on the longer run,” he said, “has to do with affordability.”

As individual vehicles have become more expensive, the loans with which to purchase them have gotten longer, he added.

Autos are being built better and now last longer with a lifespan of as much as 11 years. Those buyers who like to keep a car will benefit from the six- to eight-year auto loans, according to Mr. Strauss.

But those consumers who like to buy a new car regularly may experience sticker shock, he added, because their loans will still be “underwater” when they want to buy again and the car priced accordingly.

“We now have seen the fat years,” he said, adding that frequent repeat customers may be turned off by the higher monthly payments.

The slowing of auto sales may rub off to some degree on foreign direct investment in the industry, he added, but validated the growing importance of the Southeast as an auto manufacturing center due to FDI.

“There has been a cluster in-between Chicago and Detroit heading South including suppliers and original equipment manufacturers,” he said, pointing to right-to-work laws in Southern states as driving the move southward as companies seek to lower their labor costs.

Interestingly, he compared the current situation with that of 1980 when 77 percent of vehicles bought in the U.S. were made by one of only four companies: General Motors Corp., Ford Motor Co., Chrysler Corp. and Volkswagen, the first foreign automobile company to build cars in the United States since the end of World War II.

After experiencing five years of losses, Volkswagen closed its plant in New Stanton, Penn., in 1987, and it wasn’t until fairly recently that it opened its Chattanooga, Tenn., plant.

Japanese, Korean and European manufacturers have been establishing plants in the South, he added, even as the automotive sector became more automated and the labor share of the cost going into making a car has decreased.

Manufacturers increasingly have had to be sensitive to the costs involved in automation, logistics and currency fluctuations with the end result of an awareness that these costs encouraged local production to fill local sales, he said.

Indiana has countered the drift southward by becoming right-to-work states while Michigan and Wisconsin have loosened their regulations, but automation and logistics are increasingly determining factors where a manufacturer will go, he said, even as the labor costs become less critical.

In comparison to 1980, now while 80 percent of the autos sold in the U.S. are made in the U.S., there are 14 “nameplate manufacturers,” he said, producing the vehicles here in comparison to the four in 1980.

And he doesn’t see the prospect of manufacturers going to lower cost markets such as Mexico unless they are interested in producing cars for Latin American markets.

While Volkswagen decided to produce its Beetles in Mexico, he thought that its decision to open the Chattanooga plant for the Passants made sense in terms of a local sales strategy.

Trade barriers into Latin American countries, he said, are stiffer for U.S.-based manufacturers than from Mexico so it makes sense to use Mexico for a Latin American strategy. But for U.S. sales, the foreign manufacturers will stick to the U.S., he forecasted.

Concerning Volkswagen’s current environmental compliance problems, he was less condemning that might have been expected.

While calling the intentional skirting of U.S. emission standards “cheating,” he questioned why such a large company felt forced to  act in this way.

“I suspect that there will be some ramped up testing and we will have to see if any others have not been in compliance,” he said. “But you have to question why would a major company go down that road.”

Mr. Strauss was one of several speakers at the conference sponsored and hosted by Georgia State University‘s Economic Forecasting Center.