Looming fiscal cliff troubles auto execs
O’Sullivan sees a “major pause” if talks fail.
LOS ANGELES -- Auto executives are watching federal negotiations to avoid looming spending cuts and tax hikes, but say they can only prepare for the worst if Democrats and Republicans in Washington fail to reach a deal to avoid the so-called fiscal cliff on Jan. 1.
The uncertainty and emotional fallout from the game of chicken in Washington could take a toll beyond the dollars in consumers' pockets, some executives suggest.
Jim O'Sullivan, CEO of Mazda North American Operations, predicts the industry would see a "major pause" if negotiations fail. He said at the Los Angeles Auto Show here that a drop in the stock market would weigh on consumer confidence, causing people to further delay a new vehicle purchase.
Said O'Sullivan: "This thing is more psychological than material."
Lawmakers are bargaining over automatic cuts in federal spending and tax increases totaling $600 billion per year that are set to take effect at the first of the year. The White House says an average middle-class family will suffer a $2,200 tax hike in 2013 without a deal.
Some economists warn of another recession.
"Like all businesspeople, we'd like to see this thing resolved, and resolved as quickly as possible, because there's nothing worse in business than uncertainty," Reid Bigland, Chrysler Group's head of U.S. sales, said at the show. "We need to get this resolved, but I can't let it affect our day-to-day game plan."
Mark Fields, COO of Ford Motor Co., said the automaker is making contingency plans to cut production and reserve cash if no deal is reached.
But Bob Carter, senior vice president for automotive operations for Toyota Motor Sales U.S.A. Inc., said foul weather could slow sales more than the fiscal cliff.
"I am more concerned with a major snowstorm shutting down the Midwest or Northeast than anything happening in Washington having an effect on the market," Carter said.
John Mendel, executive vice president of American Honda Motor Co., said he had faith that a deal would be reached before year end. Still, he said, it is unwise to ignore the emotional impact on consumers.
"You can't blindly go in and say it's not going to matter. It may not matter technically, but there will be some emotional recoil" if negotiations fail, Mendel said.
Lacey Plache, chief economist at Edmunds.com, said if no deal is reached and the spending cuts and tax hikes take effect, the result would be a brief recession followed by a much sharper economic recovery than is happening.
"If we do go 'over the cliff,' we see a 20 percent drop-off of our SAAR projection for next year of 15 million. But by 2018, the projections are that we would have a much stronger recovery," Plache said. "I think what's strangling us now is that there's so much uncertainty."
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