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trucks from GM, Ford and
DaimlerChrysler have been slowing,
sales of foreign models — Toyota,
Honda, BMW VW, Nissan — have
experienced big growth. But that
growth has done nothing for Detroit's
economy. Although the foreign car-
makers continue to open more manu-
facturing plants in the U.S., they aren't
in southeast Michigan.
So lower sales by the Big 3 has a
domino effect here. Lower sales leads to
lower production, which leads to reduc-
tion in shifts, which in turn leads to
lower payroll, lower retail sales, a soft-
ened housing market and a general soft-
ening of the economy.
Littmann predicts light vehicle sales
of 16.3 million for 2001. "That will
be a very good year," he says, "the
fourth best year in auto retailing histo-
ry But the good second half of the
year won't be enough to offset the slow
first half of the year. But Detroit's
economy will begin to improve during
the summer."
Several factors will play a part,
including actions by the Federal
Reserve Board, lower taxes, a contin-
ued optimism in the economy and an
unflagging demand by Americans for
more goods and services.
"The Fed jumped on the money
gas pedal with both feet," says
Littmann, referring to the Federal
Reserve Board's actions to increase
the money supply by printing cur-
rency at a faster rate than the econo-
my is growing. "It takes six to nine
months to feel the effect of the
increased money supply."
The Fed also moved quickly to
reduce interest rates — a whole point
reduction in one month. With the
lowering of interest rates, home mort-
gage costs are down again, from 8.6
percent to the 7 percent range. The
result has been a record surge in mort-
gage refinancing. This will eventually
cause a positive turnaround in residen-
tial development.
"It also puts more money in peo-
ple's pockets," says Littmann. "They
save $200 or $300 a month on their
mortgage payment, and they spend
that money."
They'll spend those extra dollars on
things they want, including cars.
They'll also put some of it into the
stock market. The lowering of interest
rates also makes investing in the stock
market more attractive, driving the
market higher and resulting in even
more spendable cash.
"Retail sales rise in lock-step with
the increase in the stock market,"
Littmann says. "And a 10 percent rise
in the stock market results in a 14 per-
cent rise in auto sales." "The Fed had
to make a pre-emptive strike against
inflation," says Littmann. The Fed did
the right thing, he thinks. "Inflation is
the most lethal event that can happen
to an economy. It robs people of pur-
chasing power and drives financing
rates up." By putting on the brakes
with interest rate hikes, inflation was
held in check during a record growth
period. Now the Fed is moving to get
things going again.
No one will predict what kind of a
tax cut will be passed by Washington,
or what the effects of a tax cut might
be.
"Taxes are the unknown factor,"
in Littmann's opinion. But if a tax
cut does put more cash into the
hands of consumers, Detroit will feel
the benefit before the rest of the
country.
"Because of the auto industry,
Detroit's economy is a bellwether,"
says Littmann. "It signals softness, and
it signals recovery before other parts of
the country."
Beznos concedes that a tax cut will
create more disposable income. The
transfer of money within the economy
will increase, "and it's always better to
have the consumer doing the spending
... rather than the government."
Although he sees the Detroit-area
economy softening, Beznos does not
talk doom and gloom. "I wouldn't call
our economy 'depressed.' I'm opti-
mistic. I think the downturn is just
cyclical."
Schwartz is also optimistic. "As long
at the demand for more and more
goods and services by the baby
boomers continues, our economy will
keep growing," he says. "And I don't
see that demand changing at all."
First Union Securities is dedicated to helping individuals
reach their financial goals. For decades, our primary
objective has been quality—quality service aimed at
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investment objectives, including comprehensive financial,
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learn more about how we can meet your special needs,
call Sheri Gildenberg at (248) 593 5170 or visit us in
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FundSource is a fee-based senice pro-
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York Stock Exchange and S1PC. First Union Securities, Inc., Member NYSE and SIPC.. tD 2001 First Union Securities. 20141
Some Bright Spots
With a soft economy, the car replace-
ment market gets a little bump. People
keep their older cars longer and sales
of tires, batteries and service items
increase.
Jeffrey Tamaroff confirms this. "In
magazine
Oakland Connly:c Premier bjeslrle
3/23
2001
5