Will a double-dip recession wreck the auto industry?

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A professional-looking young Asian woman peers out the driver's side window of her car at the road ahead. Is a double-dip recession valley hiding up ahead?

How do we know that a double-dip recession isn't waiting around the bend for the U.S. auto industry? (Photo: ThinkStock)

Despite some of the positive sales signs that have flashed across the radar screen of the United States auto industry and auto loans landscape lately, economists wonder what could happen to the still-teetering auto industry if the current recession proves to be a “double-dip” or “w-shaped recovery” model. Will there be another government bailout if that happens? Reuters reports that this “what if” scenario is keeping industry experts up at night. While some automakers like Ford have experienced small gains in Q1 2010, the specter of the 13 percent drop in global auto sales over the course of 2009 continues to haunt the auto industry.

Investors say auto industry has turned corner

Does the auto industry deserve a bull run just yet? Reuters indicates this confidence rests upon the assumption that demand will pick up considerably in the second half of 2010. Edmunds.com CEO Jeremy Anwyl points out that the auto industry is still technically in a depression. GM and Chrysler still rely heavily upon government assistance, while Ford is working hard to pay down its non-bailout debt. Toyota is waist deep in incentives designed to repair the damage that numerous safety recalls did to its bottom line. A less than favorable turn in auto sales would put each of these automakers in considerable peril.

U.S. auto sales forecast up to 11.8 million for 2010

That would be a marked improvement on the 10.4 million sold in 2009, which was the lowest recorded total for the auto industry in 27 years, according to Reuters. A steady growth trajectory through 2011 would enable GM and Chrysler to reduce their government ownership and go forward with an IPO, although auto sales must be solid for that to occur. Double-dipping into recessionary waters could “kill or break up” GM and Chrysler, said Jack Nerad of Kelly Blue Book.

How bad could it get?

Auto sales could end up being closer to the 2009 figure than what would be needed for sustained recovery, experts predict. The ripple effect would be felt throughout 2011, as automakers and their supply companies would still be fighting for air rather than riding a wave of recovery. Economic forecast company IHS Global Insight predicts 13.8 million vehicles will be sold in the U.S. in 2011, but concedes that the number will be close to 11.3 if there is a double-dip into recession. If the latter is the case, automakers will be forced to lower their prices and offer even deeper incentives. Essentially, there would be an inventory slashing with no real recovery. As Anwyl told Reuters, “Car companies would double down on incentives.” Such a sorry financial state would become the rule, rather than the exception.

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